An investment’s failure or success is impacted by the worst and best trading days — more than you might imagine. Understand the true value of “tails.”
Investors know that time in the market is their friend. Stay in the market for a long period of time, and good things will happen, even in times of high volatility. A supporting statistic is often presented: if you miss the best days, your overall return will be dramatically lower.
For instance, between Jan. 3, 2006, and Dec. 30, 2016, a buy-and-hold strategy in the S&P500 would have turned a $100 investment into $206.
If you missed the best 0.5% of days (in this case, the best 14 days), the $100 investment would have lost money, and become $86. See chart below:
But what would happen if we were to miss the worst 0.5% of days? The $100 investment would turn into a whopping $523. The chart below illustrates this point:
The S&P500 is hardly an anomaly. We see the same pattern with different investments. For example:
$100 investment in:
Miss Best Days
Miss Worst Days
The impact of the worst and best 0.5% of trading days (a.k.a. “the tails”) have a very significant impact on success or failure of an investment
Avoiding the worst days is in many cases dramatically more impactful than catching the best days
If the cost of hedging the worst 0.5% days of the S&P500 costed an average of 500bps per year, would it be worth it?
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Katie thrives on making an impact and achieving big goals. She believes that communication strategy has a major impact on business success. As a strategic communicator with a diverse background in non-profit, B2B, healthcare, and SaaS, Katie combines her expertise in strategy development, marketing and sales to spread the word about how Covisum can help advisors and institutions inform their clients of the best financial decisions.