The Effects of Missing the Largest Days in the Market

The Effects of Missing the Largest Days in the Market

Posted on August 13, 2018
Market State 1- Bullish (25 days):  Market environment is Bullish and Risk is low. Studies performed by Canterbury Portfolio Analytics Group show that 85% of new market highs occur during Market State 1. The Characteristics of Market State 1 are as follows:
 
Long-Term: Positive
Volatility: Low/decreasing (Positive)
Short-Term Supply & Demand: Positive

Canterbury Volatility Index (CVI 50): The Canterbury Volatility Index is at its lowest level since the end of January.  Volatility has been decreasing off of its high of 102 which occurred on April 6th. Decreasing volatility is a primary characteristic of a low risk and stable market.
 
The best and worst days of the Market
 
When it comes to a buy-and-hold strategy, we often hear how costly it can be to miss the biggest up-days in the market.  A fairly recent article (published in February of 2016) on MarketWatch.com was titled “How missing out on the 25 biggest up-days can cost you dearly.” The article begins by discussing the impact of missing the 25 biggest up-days in the market and how an investor would experience a substantially reduced total-return.  This is often an argument used for the buy-and-hold methodology. By just buying and holding a fixed allocation, you participate in the swings of the market, but also experience the largest up-days that a market-timer may miss out on. 
 
Canterbury Portfolio Analytics Group recently performed a study on the largest up-days and down-days in the market.  The goal of the study was to analyze the largest days and when they occurred.  To do this, Canterbury took the largest 50 up days and largest 50 down days.
 
The results were astounding.  Out of a total of 100 days (50 up, 50 down), only 8 occurred while in a Bullish Market State.  This means that the other 92 days were in Bear or Transitional Market States.  Also, all of the top 10 largest up-days occurred during a Bear Market State. 
 
In fact, $100 invested in the market in October of 1950, would have grown to $14,152.  But, $100 invested in the market in October of 1950 that avoided the 50 largest up-days and also the 50-largest down days, would have grown to $22,310.  
 
So, what does this mean?
 
Missing the largest up-days on the market only hurts when you incur the 50 largest down-days.  Most all these days, up or down, have one thing in common: they occur during one of Canterbury’s bear or transitional market states when there is irrationally high volatility.  Compounding investments is not about participating in the largest single-day increases but is about avoiding bear markets. 
 
Bottom Line
 
In order to achieve the benefits of long-term compounding, we must know the difference between a bull and a bear market. At Canterbury, we have a unique, comprehensive process that can identify a rational (bullish) environment versus an irrational (bearish) environment.  We need to be able to identify securities that are exhibiting the right characteristics to limit drawdowns and compound returns.
 
The aim of the Canterbury Portfolio Thermostat is an adaptive portfolio strategy.  Its goal is to not only identify the current market environment, but also to navigate it by limiting portfolio drawdowns to normal market corrections and maintaining a stable and efficient portfolio regardless of the market environment- bull or bear.
 
 
Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of portfolio and risk management.

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.