If You Miss the 10 Best Days

We’ve all seen numerous studies that purport to show how passive investing is the way to go because you don’t want to be out of the market for the 10 best days.  No one ever mentions that the “best days” most often occur during the declines!

It turns out that the majority of the best days and the worst days occur near one another, during the declines.  Why?  Because the market is more volatile during declines.  It is true that the market goes down 2-3x as fast as it goes up.  (World Beta has a nice post on this topic of volatility clustering, which is where this handy-dandy table comes from.)

from World Beta

You can see how volatility increases and the number of days with daily moves greater than 2.5% really spikes when the market is in a downward trend.  It would seem to be a very straightforward proposition to improve your returns simply by avoiding the market when it is in a downtrend.

However, not every strategy can be improved by going to cash.  Think about the math: if your investing methodology makes enough extra money on the good days to offset the bad days, or if it can make money during a significant number of the declines, you might be better off just gritting your teeth during the declines and banking the higher returns.  Although the table above suggests it should help, a simple strategy of exiting the market (i.e., going to cash) when it is below its 200-day moving average may not always live up to its theoretical billing.

click to enlarge

Consider the graphs above.  (The first graph uses linear scaling; the second uses logarithmic scaling for the exact same data.)  This test uses Ken French’s database to get a long time horizon and shows the returns of two portfolios constructed with market cap above the NYSE median and in the top 1/3 for relative strength.  In other words, the two portfolios are composed of mid- and large-cap stocks with good relative strength.  The only difference between the two portfolios is that one (red line) goes to cash when it is below its 200-day moving average.  One portfolio (blue line) stays fully invested.  The fully invested portfolio turns $100 into $49,577, while the cash-raising portfolio yields only $26,550.

If you would rather forego the extra money in return for less volatility, go right ahead and make that choice.  But first stack up 93 boxes of  Diamond matches so that you can burn 23,027 $1 bills, one at a time, to represent the difference–and then make your decision.

The drawdowns are less with the 200-day moving average, but it’s not like they are tame–equities will be an inherently volatile asset class as long as human emotions are involved.  There are still a couple of drawdowns that are greater than 20%.  If an investor is willing to sit through that, they might as well go for the gusto.

As surprising as it may seem, the annualized return over a long period of time is significantly higher if you just stay in the market and bite the bullet during train wrecks–and even two severe bear markets in the last decade have not allowed the 200-day moving average timer to catch up.

At the bottom of every bear market, of course, it certainly feels like it would have been a good idea (in hindsight) to have used the 200-day moving average to get out.  In the long run, though, going to cash with a high-performing, high relative strength strategy might be counterproductive.  When we looked at 10-year rolling returns, the fully invested high relative strength model has maintained an edge in returns for the last 30 years running.

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Surprising, isn’t it?  Counterintuitive results like this are one of the reasons that we find testing so critical.  It’s  easy to fall in line with the accepted wisdom, but when it is actually put to the test, the accepted wisdom is often wrong.  (We often find that even when shown the test data, many people refuse, on principle, to believe it!  It is not in their worldview to accept that one of their cherished beliefs could be false.)  Every managed portfolio in our Systematic RS lineup has been subjected to heavy testing, both for returns and–and more importantly–for robustness.  We have a high degree of confidence that these portfolios will do exceedingly well in the long run.

12 Responses to If You Miss the 10 Best Days

  1. joe thompson says:

    You left out the obvious — use high relative strength strategy only above 200 DMA — by doing so you have the best of both worlds.

  2. Mike Moody says:

    We DID the obvious: the test DOES use the high RS strategy only above the 200 DMA. That’s where the red line comes from–exactly what you say. It’s not the best of both worlds. Using high RS only when above the 200 DMA still doesn’t perform as well as using high RS all the time.

  3. Jim says:

    did you include the returns on cash when below the 200 day? the graph doesn’t look like it.

  4. Mike Moody says:

    We assumed that the cash returns would be largely consumed by the approximately 300% turnover of the 200-day moving average portfolio, so there is no return shown for cash. (We also did not add in dividends, which would be higher in the fully invested portfolio.) I would say our research results should be considered illustrative rather than definitive. It wasn’t what anyone would expect.

  5. Jim B says:


    Could you cite the older DW study that shows the returns having missed both the 10 best and worst days…I believe it even showed missing 20 best and worst..relative to buy and hold (Don’t have to be perfect to beat buy and hold). Also, if one had a more robust (sensitive) model that would be far more reactive than that of the 200 day MA…would not a relative strength mechanical program during an up trajectory, followed by a cash or mkt neutral stance in a sideways or down trajectory be ideal?

  6. Mike Moody says:

    You’d have to search the archive on the research database for the DW best/worst days study. I’m not sure if a more sensitive model would help–if you read our White Paper on our testing protocols, you can see that making things more sensitive generally reduces returns because you get more noise and more whipsaws. (This last head fake with the NYSE BP is a good example of a whipsaw. It can happen with any sensitive indicator.)

  7. jill says:

    Isn’t the whole point of a moving average system to reduce volatility and drawdown and not increase returns?

  8. Mike Moody says:

    Absolutely correct–but many investors think that they will get a magical combination of less volatility and more return. In fact, the magical combination CAN occur over short time horizons, but doesn’t tend to pan out over long periods. If the goal is to reduce volatility and happily accept lower returns, a moving average system (or any similar market-timing method) is a perfectly good choice. The problem is that many investors would like the big returns, but they don’t like the volatility that is the inevitable side dish.


    Great research thanks Mike – will help me hang on to PDP.

    “World Beta has a nice post on this topic of volatility clustering, which is where this handy-dandy table comes from.”

    World Beta did a similar test on their RS model which concurred with your results.

    However they then re-ran it using the SPX [not the model’s] 200ma as the filter.
    They got improved results, albeit with a much shorter test period.

    Worth a try on your model ?

    “I used the Fido Sector funds from 1988-5/2009.
    I then took the top 3 funds, equal weighted and updated monthly, based on the average rolling 3/6/12 month performance.
    I then took the same portfolios, but moved them to cash when the S&P500 declined below its long term moving average (10 month simple).
    Using the timing system to hedge the portfolios resulted in declines in volatility (around 20%) and most importantly, a reduction in drawdown from 53% to around 27%. Sharpe #s are misleading due to the high returns. . .”

    • Mike Moody says:

      If you use the S&P 500 as a bogey, both portfolios should beat it, as high RS portfolios generally outperform the market benchmarks. We’ve run similar tests. I think the general take away is most important: since risk can neither be created nor destroyed, when you reduce your drawdowns, you tend simultaneously to reduce your returns. Over short time periods–like 2000-2009, which had two bear markets–it might look like that is not true, but over longer time frames it IS often true.

  10. We are debating here if once the cash was raised in the comparison model whether you 1) reinvested it after the market corrected or 2) you left it in cash? It seems to me that you left it in cash once it was raised. The study does not mention anything about re-entry.

    • Mike Moody says:

      The cash was reinvested. (If it were left in cash, the equity curve would be a straight line after the first cash raising.) Once the strategy was back above its 200-day moving average, the position was re-entered.