By: Steve Smith
Sometimes, as you may have noticed, even the experts get things wrong.
These experts say stay in the market to catch the best 10 days, but they’ve got it completely backwards. Today, I’ll show you what the experts miss about “timing the markets” – and how you can flip it to your advantage.
Investors are also told not to try to time the market. And for most people with a 20-30 year time horizon saving for retirement, that is sound advice.
In those cases, the tools for withstanding the inevitable pullbacks in the market are allocation, diversification, and a systematic process for putting capital to work such as dollar cost averaging or a time-based approach, such as committing to investing a certain amount on a monthly or quarterly basis.
Here at Options360, we are fairly active and the very fact options come with an expiration date means there is always an element of “timing” to our trading.
When most people think of market timing, it’s about initiating trades; buying a dip or shorting the top. However, what I’m talking about is the opposite; it is knowing when to sit on the sidelines during unfavorable environments and avoiding the urge to force trades.
When financial advisors try to explain why one shouldn’t try to time the market, they usually point to a chart or table which shows the returns of the S&P 500 (SPY) compared to if you had missed the best 10 days of each year or avoided the 10 worst. It’s compelling, especially over the past 10 years as remaining fully invested returned some 650%, while missing the 10 best days returns just 300% or less than half.
But this is what I consider the FOMO approach. For those of you who have been trading alongside us for a long time, you’ll know that I don’t subscribe to FOMO, but rather HIMI, or Happy I Missed It.
Over the past few years, I strictly avoided SPACs, profitless IPOs, crypto and anything else that seemed to be in a speculative bubble. Sure as these assets were soaring, and I felt left out, but I knew it was important to not get caught up in what surely would end in tears. And sure enough many of those highflying stocks have completely imploded.
The chart below illustrates the importance of a strategic bit of market timing that can greatly improve your returns.
But look at the chart below which includes a graph with the performance if you excluded the worst 10 days of the year.
As you can see by avoiding losing days you would have nearly tripled your return over the past 12 years.
Options360 will never completely exit the market, it’s rare for it to have no positions. But there are periods where I will be less active or play things closer to the vest.
Yesterday, I established a bearish position in the SPY which is performing well, but I also established a bullish position in Visa (V). After it opened lower, I made a quick adjustment to defend the position. Now, as the selling is accelerating, I’m simply closing the position for a manageable 18% or $70 loss.
I’m sensing the market may be rolling over and this could be the beginning of a new leg lower. I want to avoid getting caught holding too much upside exposure.