Avoiding The Worst Days

Mar 2020

“The cost of missing the market’s best days is high” – financial institutions and advisors often tell investors not to sell during periods of significant volatility because, if they miss some of the best performing days, their returns will suffer. While true, our research shows that avoiding the market’s worst days has historically been a much more productive approach.

Understanding the Impact of Losses

Over the last 20 years, the S&P 500 has been down 50% or more twice.1 Simple math tells us when your portfolio is down 50%, you need 100% return to break even. Assuming a 6% annualized return, it will take almost 12 years to recover. Many investors don’t have the time or financial ability to withstand such an event. Even if they do, many will succumb to the stress large drawdowns create selling near market bottoms and locking in losses that will prove hard to recover from in the future. Simply put, the financial and emotional impact of significant corrections can be devastating.

Do You Have Time to Recover?

* Assumes hypothetical 6% annual rate of return
Source: Blue Square

Risk Less and Accomplish More

To help investors manage market volatility, the conventional wisdom of investment firms is to recommend a traditional asset allocation. The thinking goes, a buy and hold approach will help investors accomplish their long-term goals but, for it to work, they’ll need to stay invested all the time including during severe market declines. This is where the “cost of missing the markets best days” research comes into play. Some time ago, most of the industry accepted that it would be easier to convince investors to weather the storm instead of developing a different approach that actually minimizes the impact of them. No one wants to miss the best performing days of the stock market. Interestingly enough, the historical data demonstrates that avoiding the worst days has a profoundly positive impact on returns.

The following chart shows the performance of the S&P 500 Index from 1998-2019 utilizing 3 Different Scenarios:

Buy and Hold: $1,000,000 invested into the S&P 500 in 1998, grows to $5,045,782 in 2020.

Missing the 10 Best Days in the Market: If you invested $1,000,000 into the S&P 500 in 1998, but MISSED the 10 BEST performance days, twenty years later your investment had grown to $2,518,154

Missing the 10 Worst Days in the Market: If you invested $1,000,000 into the S&P 500 in 1998, but AVOIDED the 10 worst performance days, twenty years later your investment had grown to $10,721,11

Effect of Missing the 10 Best or Worst Days in the S&P 500 Total Return, 1/2/1998 – 12/31/2019

Daily Frequency
Source: Y Charts, Blue Square as of 1/29/2020
The S&P 500 Total Return index price represents the total return that includes both changes in price and the effect of dividends reinvested. References to indexes are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and do not reflect the deduction of the advisor’s fees or other trading expenses.  Past performance may not be indicative of future results.

As you can see in the illustration, the historical performance was significantly better when the 10 worst days were missed.

The traditional buy and hold strategy suggests that in order to reap the long-term benefits of investing, your portfolio must endure the full brunt of major market corrections. We do not believe your portfolio has to take on the full risk of the market in order to achieve your goals.

You Deserve Better

Blue Square Wealth is a firm dedicated to reducing the risk in your portfolio utilizing our proprietary market indicators. Our risk indicators help us to adjust your portfolio allocation between stocks and cash. When the indicators reflect we are entering a market down-trend, we allocate more of your portfolio into cash. Conversely, when our indicators show the market is moving into an up-trend, we allocate more of your portfolio into stocks. Our strategy has resulted in delivering returns that are capturing a significant portion of the market’s best days, while significantly reducing your exposure during the market’s worst performing days. Blue Square Wealth employs our proprietary investment strategy to manage the risk of your portfolio enduring the full brunt of market corrections

1) Declines of 50% or more in the S&P 500 Total Return Index, Source: Morningstar, Blue Square as of 9/16/2018

Blue Square Wealth is a SEC-Registered Investment Adviser. A copy of the Firm’s Current Disclosure Brochures can be found on the SEC’s IAPD site or may be requested at any time by contacting us. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Securities and Exchange Commission.

All investment strategies have the potential for profit or loss; changes in investment strategies, contributions or withdrawals may materially alter the performance and results of a portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio. Past performance is not indicative of future returns.

Significant risk may accompany investments in stocks, bonds or other asset classes over short periods of time. Investment return and principal value will fluctuate with changes in market conditions. Your investment may be worth more or less than your original cost. Past performance is not indicative of future results.

This blog is a publication of Blue Square Wealth. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of subjects discussed. All expressions of opinion reflect judgment of author as of date of publication and are subject to change. Information contained herein does not involve rendering of investment advice. A professional adviser should be consulted before implementing any of strategies presented. Information is not an offer to buy or sell, or a solicitation of any offer to buy or sell securities mentioned herein. Different types of investments involve varying degrees of risk. Economic factors, market conditions, and investment strategies will affect performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. This document may contain forward-looking statements relating to objectives, opportunities, and future performance of U.S. markets generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “should,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to economic conditions, changing levels of competition in industries and markets, changes in interest rates, and other economic, governmental, regulatory and other factors affecting a portfolio’s operations that could cause results to differ materially from projected results. Such statements are forward-looking in nature and involve known and unknown risks, uncertainties and factors, actual results may differ materially from those reflected in forward-looking statements. Investors cautioned not to place undue reliance on forward-looking statements / examples. None of Blue Square Wealth or any affiliates, principals nor any other individual / entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances.