Portfolio risk: how much value is in the tails?

Katie Godbout, Director of Sales & Marketing
August 31, 2017
    

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 01/03/2006 to 12/30/2016, 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:

MissBest14.png

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:

 MissWorst14.png

The S&P500 is hardly an anomaly. We see the same pattern with different investments.

For example:

$100 investment in:

Buy-and-hold

Miss Best Days

Miss Worse Days

SPY

$206

$86

$523

AGG

$148

$116

$191

GIS

$279

$144

$557

AAPL

$1,298

$370

$4,799

 

Conclusions:

  • 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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Posted by Katie Godbout, Director of Sales & Marketing
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.