Get Out Of the Market On Occasion – It’s the Most Profitable Strategy – Here’s Proof

…[Someone] recently informed me that an Invesco fund family study…[had concluded that] missing the “10 best days” of the market each year would result in wiping out virtually any gains over a longer-term horizon. Ugggggh…[This article refutes that conclusion in its emtirety!]

First of all, Wall Street firms from Fidelity to Invesco have a vested interest in making certain that you are always invested. That is why the Wall Street marketing machine pushed, “It’s time in the markets, not timing the markets.” Fund families make their money on commissions and internal expenses associated with you staying right where you are. They need assets under management; they cannot afford to let you sell. The same holds true for the financial media that generate revenue from advertising dollars from – yep, you guessed it – Wall Street financial companies.

Second, it is ridiculous to assume that when you choose to reduce some of your exposure to stocks that you’re only going to miss out on the wonderful bull market up days. If you’re out, you’re going to miss plenty of the unbelievably awful days as well. One is not capable of tragically missing out on all of the great days, nor is one capable of deftly avoiding all of the devastating down days.

It follows that a person may be better served by understanding the ramifications of:

• missing the “10 best days” and the “10 worst days” versus holding-n-hoping every position,
• missing the “25 best days” and the “25 worst days” versus holding everything you own,
• missing the “50 best” and 50 worst” or even,
• missing the “10 best quarters” and the “worst 10 quarters”

so let’s evaluate facts that Wall Street tries to keep from you with a look at the S&P 500 since 1970.

As stipulated before, nobody is going to perfectly miss only the 25 best days in each year of a market, anymore than he/she will miraculously miss the 25 worst days in the market. That said, one thing should still stand out in the chart below – something that Wall Street never mentions. As shown by the growth of the green line, missing the bad times is far more critical than missing out on those good times.

The same findings have been replicated over and over. The folks over at Stock Trader’s Almanac found that the effect of missing the “50 Worst Days” is substantially more powerful than missing the “50 Best Days.” (Not that you’d hear this from the “it’s time in the market” Wall Streeters.) Again, however, the more powerful message is the reality that missing BOTH the “50 Worst” and “50 Best” outperformed buy-n-hold between 1994 and 2014.

Still not convinced that buying-n-holding all market days could be problematic? Here is yet another look at 65-plus years of data on the Dow Jones Industrials Average. Once again, the media and Wall Street would want you to focus only on “buy-n-hold” at all times as it relates to missing the best three-month periods since 1950. And sure, if you managed to miss the 10 best quarters since 1950, you would have done far worse than had you simply stayed in the Dow through thin and thick. However, that is only HALF the story. Side-stepping the 10 worst quarters since 1950 had a far more powerful effect. Again, it would not have been able to do so, but it would not have been feasible to have only missed the 10 best quarters either. Most critically? Missing the best quarters and missing the worst quarters over 65 years dramatically outperformed buy-n-hold.

The take-home? Minimizing monstrous losses is far more critical to creating and maintaining long-term wealth than chasing returns via Wall Street’s tag-line, “time in the markets, not timing the markets.”

…When stocks are exceptionally overvalued on a fundamental basis, when the FTSE Multi-Asset Stock Hedge Index is hitting “higher highs,” when risk-off assets like Treasury bonds outperform stocks for 6 months, 12 months and 18 months, when stagnation threatens domestic and foreign economies, I reduce the percentage exposure to stocks. I also reduce the percentage exposure to any bonds that do not qualify as investment grade. Moreover, I make sure that the holdings themselves are low volatility securities with relatively strong balance sheets. My clients prefer some time out of the markets – and we are not talking about 100% in or 100% out.

…Some time out of the markets during the tech wreck (2000-2002) and the financial crisis (2007-2009) was beneficial to maintaining their standard of living going forward. Then, like now, some dry powder in the form of cash/cash equivalents helped reduce volatility. Then, like now, cash is how one can acquire desirable assets at lower prices down the road.

Disclosure: The above article was edited ([ ]) and abridged (…) by the editorial team at munKNEE.com (Your Key to Making Money!) to provide a fast and easy read.

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