I just went back to 1970 for the S&P 500 and the trendlines were accurate all the way. So cool. And the current trend is up on the monthly, weekly and approaching the upper daily trendline.
Buy and hold is indeed a strange concept. Perhaps people forget how short life is and that markets don't always go up with only 1 year down like 2022. Look at the SP500 historical chart going back 90+ years. From 1929 to 1955, there were zero new all-time highs. That's 26 years of not making any return. How about 1969 to 1992 - 23 years without a new all-time high. 2000 to 2015 - 15 years. So since 1929, there were 26+23+15 = 64 years out of 95 years where the market did NOT go up. The market only goes up 33% of the time. How do you know one of those periods isn't about to happen now? What if the next period is 35 years long and starts in 2 months? Your financial security is too important to just shrug that question off.
Good points, and I made a similar emphasis in my weekly update on the leverage article saying "Buying in March, 2009 at $30, I doubt there were many people predicting or expecting it to be $420 in January, 2024. Going forward, it might fall to $80 as Kaplan claims it will, or it might go on to $5000 in 15 years, matching the last 15 years. There’s simply no way to know in advance, so simply draw the lines and check them once a week."
The reason that the return is so much lower if you miss the best 5 days is due to compounding. Let's say each of those best days was 5%. Missing them leaves a smaller portfolio to compound the rest of the year's gains. Over 20 years, the portfolio would be more than 50% lower not just 25% lower.
Missing the top 1% days appears to leave a net negative when you add all the days. This can make sense mathematically. For instance, if your returns for 10 days were: 3, -1, 3, 6, -1, -2, 1, -3, 2, -3 and I take away the best day "6", what happens when you simply add all the numbers? You get -1. All 10 days gives a total return of 5. That is without compounding. If you take this concept further and repeat those 10 numbers and always remove the "6" for several years as they did in the article, then you see how that -1 could become a -60 or -70 after a long time.
Of course both examples are ludicrous. Anyone getting scared and getting out of the market would never have anywhere near as bad as these results because they would also miss some of the worst days. But the math is correct. In fact, it is similar to the math you are trying to demonstrate provides better returns by making practical decisions to protect your profits. Essentially you are selling to eliminate some of the worst negative days (and some positive days).
You can use the same set of numbers and assume you were able to get out after the 6th number because you saw a -1 followed by a -2: Here is that set again. 3, -1, 3, 6, -1, -2, 1, -3, 2, -3. After a big run up with the "6" you were ready to sell and protect your profits. You avoided "1, -3, 2, -3" so your total return was 8 instead of 5. Over time, especially with compounding, this will have huge outperformance.
Perhaps, you are not as accurate with the timing and wait until the 8th number "-3" and then hit the exits. You still avoid "2,-3" so your return is 6 instead of 5. Over a long time this also compounds and gives you much better returns.
I roughly understand the math trick used. Here's an interesting link for the best and worst days back to 1929, and you can click to list them by date as well.
I just went back to 1970 for the S&P 500 and the trendlines were accurate all the way. So cool. And the current trend is up on the monthly, weekly and approaching the upper daily trendline.
Buy and hold is indeed a strange concept. Perhaps people forget how short life is and that markets don't always go up with only 1 year down like 2022. Look at the SP500 historical chart going back 90+ years. From 1929 to 1955, there were zero new all-time highs. That's 26 years of not making any return. How about 1969 to 1992 - 23 years without a new all-time high. 2000 to 2015 - 15 years. So since 1929, there were 26+23+15 = 64 years out of 95 years where the market did NOT go up. The market only goes up 33% of the time. How do you know one of those periods isn't about to happen now? What if the next period is 35 years long and starts in 2 months? Your financial security is too important to just shrug that question off.
Good points, and I made a similar emphasis in my weekly update on the leverage article saying "Buying in March, 2009 at $30, I doubt there were many people predicting or expecting it to be $420 in January, 2024. Going forward, it might fall to $80 as Kaplan claims it will, or it might go on to $5000 in 15 years, matching the last 15 years. There’s simply no way to know in advance, so simply draw the lines and check them once a week."
The reason that the return is so much lower if you miss the best 5 days is due to compounding. Let's say each of those best days was 5%. Missing them leaves a smaller portfolio to compound the rest of the year's gains. Over 20 years, the portfolio would be more than 50% lower not just 25% lower.
Missing the top 1% days appears to leave a net negative when you add all the days. This can make sense mathematically. For instance, if your returns for 10 days were: 3, -1, 3, 6, -1, -2, 1, -3, 2, -3 and I take away the best day "6", what happens when you simply add all the numbers? You get -1. All 10 days gives a total return of 5. That is without compounding. If you take this concept further and repeat those 10 numbers and always remove the "6" for several years as they did in the article, then you see how that -1 could become a -60 or -70 after a long time.
Of course both examples are ludicrous. Anyone getting scared and getting out of the market would never have anywhere near as bad as these results because they would also miss some of the worst days. But the math is correct. In fact, it is similar to the math you are trying to demonstrate provides better returns by making practical decisions to protect your profits. Essentially you are selling to eliminate some of the worst negative days (and some positive days).
You can use the same set of numbers and assume you were able to get out after the 6th number because you saw a -1 followed by a -2: Here is that set again. 3, -1, 3, 6, -1, -2, 1, -3, 2, -3. After a big run up with the "6" you were ready to sell and protect your profits. You avoided "1, -3, 2, -3" so your total return was 8 instead of 5. Over time, especially with compounding, this will have huge outperformance.
Perhaps, you are not as accurate with the timing and wait until the 8th number "-3" and then hit the exits. You still avoid "2,-3" so your return is 6 instead of 5. Over a long time this also compounds and gives you much better returns.
I roughly understand the math trick used. Here's an interesting link for the best and worst days back to 1929, and you can click to list them by date as well.
https://en.wikipedia.org/wiki/List_of_largest_daily_changes_in_the_S%26P_500_Index