Half A Story Is As Bad As The Wrong Story

One more time for those at that back and hard of hearing.

This is a repeat of something I have spoken about innumerable times in the past, but it is worth repeating because it is so important. If you ever have dealings with a financial planner or fund manager, they will show you a graph similar to the one below.

The graph highlights that if you are an investor, you need to be in the market all the time because if you are not, you miss the best days, and this has a dramatic impact on your performance. However, this is only half the story because markets also go down and this graph fails to consider that the relationship between gains and losses within markets is asymmetrical. If I lose 10% I cannot make up this loss with a 10% gain on the remaining capital.

This is well illustrated by the chart below showing the gain required to make up for a given loss.

I generated my version of missing a “good” period in the market. In this instance, I compared missing those months when the market went up 10% compared to being fully invested all the time.

As you would expect it agrees with the chart from Betashares.

Missing out on periods where the market went up 10% had a detrimental impact on performance compared to being in the market all the time. However, as we know markets generate gains and losses and when I include missing those periods where the market went down 10% I get the following. It is worth noting that the pattern you see repeats over all time frames and all values.

Being able to avoid or manage those times when the market falls is far more beneficial than sitting in the market all the time. This is why you must learn how to determine which phase the market is in and when to play defence.

When your fund manager or financial panner shows you a chart like the one generated by Betashares ask to see one that looks at what missing the worst periods looks like.