Don’t miss the best days fallacy, Best 6 Months/Sell In May avoids worst captures best
How many times have you seen a chart like the next one? This is (at least I have been told) a primary reason why you should never sell. If you sell, you will miss the best days and your returns will suffer dramatically. A $100,000 investment (excluding dividends, fees and taxes) beginning on December 31, 1993 would have grown to $439,335 on December 31, 2014 for a gain of $339,335. Missing just the Top 30 Best performing S&P 500 days results in a loss of $9,539. Clearly, the Best Days are important.
However, look at what happens when we shift focus to missing the Worst S&P 500 days. Missing the 50 Worst S&P 500 days between 1994 and 2014 results in a staggering $5,156,155 gain from the same hypothetical $100,000 investment.
Missing just the 50 Worst Days would be a feat of epic market timing especially since many of the Worst Days are also followed immediately by many of the Best Days. This is the very definition of market volatility. Down 4% on Monday only to snap back 4% on Tuesday. Even though the effect of missing the 50 Worst Days is substantially greater than missing the 50 Best Days here is what happens when both the 50 Worst & 50 Best are missed. This still outperforms buy and hold between 1994 and 2014.
How Our Seasonal Switching Strategy Beats the Market
Based upon the three bar charts above we should not be so concerned about missing the Best Days, it is actually the Worst Days that destroy returns. Our Seasonal Best Months Switching Strategy, often referred to as “Sell in May,” outperforms the broader market because it avoids a majority of the Worst Days while capturing the majority of the Best Days. Using the dates for our annual buy and sell signals, located here, from 1994 to 2014 for S&P 500, our strategy has missed 26 of the Worst S&P 500 days while capturing 30 of the Best S&P 500 days. This combination is the reason why our strategy has outperformed.
Our Seasonal Switching Strategy is based upon Yale Hirsch’s discovery of the “Best Six Months,” November through April, shared in the 1986 Stock Trader’s Almanac. November through April did not become the “Best Six Months” until after 1950 for the reasons above. We do not claim the strategy worked before 1950 nor do we claim it will always work in the future however, as long as people continue to use the summer as vacation time and school resumes sometime in late August, early September, we expect it will continue to outperform the market over the longer haul.
It is fine to miss the Best Days especially if you miss the Worst Days too. On or after October 1 we will be waiting for our Best Six Months Seasonal MACD Buy Signal to trigger and will email newsletter subscribers as soon as it does.
The above study was initially run using data from 1950-2014. The overall results mirrored those of the most recent 21-year period 1994-2004. A hypothetical $10,000 investment in S&P 500 (excluding dividends, fees and taxes) grew to $1,228,461 using buy & hold. Missing the 50 Best S&P 500 days trimmed results to just $104,275 while missing the 50 Worst days resulted in an eye-popping $23,091,315 (not a typo) balance on December 31, 2014. The combination of missing both the 50 Best and Worst S&P 500 days saw $10,000 grow to $1,960,055, still a substantial out-performance of buy and hold.
