Or, No Risk It, No Biscuit As our readers have probably noticed, the stock markets have seen quite a pick up in volatility over the last few months. Stories of returns being eliminated, if not reversed, in the fourth quarter of 2018 abound, and so far in 2019, it appears bull and bear forces continue to battle. Somewhat predictably, discussion regarding the benefits of active trading goes hand in hand with volatility. While we are not professional money managers, and will readily admit there are many people out there who successfully trade the market and have much (much) larger pocketbooks than we do, in such times we are reminded of some of the follies of trying to time the market. The case study that resonates the most in this regard is the surprisingly large impact of being out of the market on its best performing days, even if one is largely invested over the long-term. While the most referenced study on this topic seems to come from JP Morgan Asset Management’s 2015 Guide to Retirement, the most updated version (that we could find anyways) comes from Index Fund Advisors, which illustrates clearly how missing only a few days (that’s right, individual days – not months, or years) can have a dramatic impact on returns. For example, the below table shows the impact on an investor who invested $10,000 in the S&P 500 from 1998 through 2017 (20 years, or 5,036 trading days): Investment Period (1998-2017) | Annualized Return | Value of $10,000 by 2017 | | Entire period | 7.20% | $40,135 | | Miss the 5 best performing days | 5.02% | $26,625 | | Miss the 10 best performing days | 3.53% | $20,030 | | Miss the 20 best performing days | 1.15% | $12,570 | | Miss the 40 best performing days | -2.80% | $5,670 |
This is crazy. Missing just 0.007% of trading days over the course of 20 years means the investor loses money!Of course, the opposite also holds true, namely that missing the worst performing days also significantly enhances returns. Such is the allure of trading the market. From the good people at IFA once again: | Investment Period (1998-2017) | Annualized Return | Value of $10,000 by 2017 | | Entire period | 7.20% | $40,135 | | Miss the 5 worst performing days | 9.52% | $61,675 | | Miss the 10 worst performing days | 11.31% | $85,277 | | Miss the 20 worst performing days | 14.23% | $142,997 | | Miss the 40 worst performing days | 19.05% | $317,107 |
The reason that missing individual days of performance matters so much to returns is that the investor either can, or cannot, compound the positive returns (or avoided losses) over the remainder of the holding period. Yes, compound interest truly is the 8th wonder of the universe.The problem (somewhat akin to having a toddler) is that most can’t know ahead of time which days will be the good ones, and which will be the bad, highlighting the appropriateness of long-term, passive investing strategies for the majority of people. Basically, you have to be in it to win it. Now, what does this have to do with small business? While we observe recent market action with a watchful eye, the day-to-day performance of our team of small businesses is isolated from recent market volatility. For sure, a broader economic recession would impact our businesses (as it would most businesses), but to us, performance is more heavily impacted by the successful implementation of various operational initiatives, or (for the next couple of months, at least) how much it snows in various New England zip codes. Broadly speaking, however, the benefits associated with continuous market exposure also apply to us. Since we are unlikely to predict the specific days where value will be created or destroyed, we believe that holding assets for the long-term, without worrying about trading them around, is our best path to generating returns. Furthermore, it occurs to us that if we are unwilling to work through the occasional unexpected speed bump, we may inadvertently miss out on the days where real transformational progress is made. We, too, have to be in it to win it. After all, no risk it, no biscuit. | 
