Should Investors Time the Market?
Conventional investment wisdom often centers on the refrain “stay invested so you don’t miss the best days.” Mutual fund companies and many advisors bolster this message with charts showing the dramatic reduction in returns if you are out of the market on just a handful of the top‐performing days. While there’s truth to the power of those best days, this perspective ignores a crucial—and often more impactful—counterpart: the damage caused by the worst days.
The Standard Argument: "Missing the Best Days"
The chart titled “The Cost of Timing the Market” from Visual Capitalist is a textbook example of what mutual fund companies and many advisors often emphasize. It shows how a $10,000 investment in the S&P 500 from January 2003 to December 2022 would have grown to $64,844 if you stayed fully invested—but drops dramatically if you miss just a handful of the market’s best single‐day gains.
Seven out of the 10 best days shown on the chart occurred during bear markets, which underscores a critical point: the best days often cluster with the worst days in periods of extreme volatility. Fund companies routinely highlight this “missing the best days” data to reinforce buy‐and‐hold behavior. They argue that trying to time the market will inevitably cause investors to miss these sudden rebounds, thereby derailing their long‐term returns.
While this illustration is factually accurate in showing how detrimental it can be to miss major upswings, it omits an equally potent force: the value of avoiding the worst days. In practice, reducing exposure during tumultuous bear markets may mean missing both the powerful rallies (best days) and the steep sell‐offs (worst days)—and data shows that sidestepping even a handful of the latter can have a far larger impact on overall returns.
A More Realistic Scenario - Missing the Best AND Worst Days
The Often‐Ignored Counterpart: “Missing the Worst Days”
Far more often than not, the market’s biggest up and down days happen during the same periods of extreme volatility—usually deep in bear markets. That means that if you employ some form of tactical risk management, you’re statistically less likely to experience only the best days without the worst. In practice, if you step off the roller coaster when volatility spikes, you typically miss both the major drops and the occasional bounce‐back surges.
- Smoother Ride, Less Stress: By missing both the best and worst days, you’re not subjecting your portfolio to the full force of the market’s wildest swings. While you won’t capture every dramatic rally, you also avoid the largest and most devastating losses, resulting in a smoother growth path.
- Better Risk‐Adjusted Returns: Historical data shows that avoiding the worst 25 days can have a much larger positive impact on your outcome than missing the best 25 days has on the downside. Combining these two effects—missing both extremes—can lead to surprisingly robust risk‐adjusted returns.
- Realistic Volatility Management: Markets are cyclical, and the biggest single‐day gains and losses are often back‐to‐back in crisis periods. A pragmatic, defensive strategy that pulls back in turbulent times naturally stands to bypass both the dramatic drops and their subsequent rebounds, delivering a more consistent portfolio trajectory in the long run.
This “missing both” approach challenges the simplistic “don’t miss the best days” narrative, offering a real‐world look at how tactical adjustments can preserve capital and deliver competitive returns—even if you forego some of the best single‐day pops.
The data shows that while you wouldn’t match the spectacular gains of “only missing the worst days,” you’d still finish with a balance of around $92,000, beating the buy‐and‐hold strategy’s $80,000.
What fund companies and many “missing the best days” charts fail to show is the incredible impact of avoiding the market’s worst days. While missing out on a few dramatic upswings can certainly hurt returns, sidestepping the most severe sell‐offs can be an even more powerful way to protect and grow capital over the long term.
- Drastic Difference in Returns: If you can avoid just a handful of the biggest daily drops—those that often cluster in bear markets—the cumulative effect on your portfolio can dwarf the gains you’d have reaped by catching the best single days. Real‐world data consistently shows that a strategy of missing both the best and worst days can yield steadier returns and smaller drawdowns than simply riding out every market storm.
- Context Matters: Just as the largest up days occur in volatile bear markets, so do the steepest down days. Thus, stepping back during times of crisis can mean forgoing both extremes. Instead of chasing every upswing, you limit catastrophic damage by not enduring the biggest plunges in the first place.
By focusing solely on “missing the best days,” mutual fund companies present a compelling yet incomplete picture—one that often discourages any tactical approach to market volatility. Understanding what happens if you also miss the worst days shines a revealing light on the benefits of proactive risk management.
So, what if you had missed the 25 most devastating trading days instead? The data shows that your initial $10,000 would have grown to an astonishing $409,000, far outpacing the $80,000 from buy‐and‐hold.
- Chart Takeaway: In the “Miss the Worst 25 Days” graph, the line for that strategy soars far above the buy‐and‐hold index. Missing just a few catastrophic plunges—again, often clustered in bear markets—has an outsized positive effect on your total return.
Why the Best and Worst Days Cluster in Bear Markets
One of the biggest misconceptions in investing is that markets grind steadily upward, sprinkling in a few big up days here and there. In reality, most of the most explosive upside days and stomach‐churning drops happen during bear markets—when fear and volatility peak. Why? Because the forces driving extreme price movements, such as margin calls, forced liquidations, and emotional selling, are all magnified when investors perceive heightened risk.
Extreme Volatility and Forced Selling
Bear markets often ignite a cycle of forced selling. Investors facing margin calls or liquidity crunches are forced to liquidate positions quickly, sometimes regardless of price. This can send markets tumbling downward in a hurry. But in these same periods, when prices drop dramatically, opportunistic buyers or short‐covering can step in, causing equally dramatic rebounds. The result is both the worst and best days packed into short bursts of volatility.Fear and Emotion as Market Drivers
In bull markets, confidence tends to rise as everyone chases returns. Prices generally move upward in a more orderly fashion. But in bear markets, fear takes over, overshadowing other market fundamentals. Panic selling can push indexes to lows out of proportion to fundamental valuations—only for prices to bounce back sharply when cooler heads prevail or new information emerges. This whipsaw environment fuels some of the most volatile daily swings you’ll see over an entire market cycle.Short‐Covering Rallies
In a downtrend, many traders “short” the market, hoping to profit from further declines. However, as soon as there’s a catalyst for recovery—such as a sudden piece of optimistic economic data—those short positions may be forced to close rapidly, causing a flood of buy orders. When that happens, the market can surge violently upward, turning a brutal sell‐off into a massive short‐covering rally in just a few trading sessions.Liquidity Gaps
Another factor is liquidity. In calm bull markets, there’s generally plenty of trading volume, ensuring tight bid‐ask spreads and smoother price moves. But in the depths of a crisis, many participants step away from the market, creating liquidity gaps. Fewer buyers and sellers mean even modest trades can trigger large price swings, intensifying both declines and rebounds.
Ultimately, the “best days” and “worst days” tend to get clustered together because both are driven by the same underlying forces—volatility, emotion, and rapid changes in liquidity. While buy‐and‐hold advocates cite these big up days to discourage any attempt at market timing, the reality is that these outsized returns don’t come in isolation; they are inextricably linked with bear market panics. Understanding this dynamic is crucial for anyone considering a tactical approach to risk management, as it emphasizes how difficult—and how powerful—it can be to navigate market extremes.
Bringing It All Together
The data on “missing the best days,” “missing the worst days,” and “missing both” underscores a single, powerful truth: volatility cuts both ways. Yes, missing the best days can seriously dent your returns if you’re arbitrarily out of the market at the wrong times. That’s the point most mutual fund companies drive home to keep investors from panic-selling. But they rarely highlight the fact that the worst days occur in the same time periods. And when you look at both the best and worst days together, a more realistic tactical scenario emerges—one that can actually offer smoother returns without giving up growth potential.
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Missing the Best Days (What You’re Always Shown)
Mutual fund companies love to show how much a portfolio would underperform if it misses the top-performing days. While the math is correct, the context often isn’t. Those “best days” almost always pop up in the middle of crises and drawdowns, precisely because severe volatility swings can spark oversized rallies. -
Missing the Worst Days (What You’re Not Shown)
A look at the data shows that avoiding the largest drawdowns can supercharge your long-term returns. In fact, missing the worst 25 days of the market has a far more dramatic impact on performance than missing the best 25 days does. This is largely because it’s easier to dig yourself out of a small hole than a crater. Avoiding those catastrophic losses preserves capital, which then compounds over time. -
Missing Both (The Pragmatic Reality)
The truth is that these extreme days—both up and down—cluster together in bear markets. If your risk management strategy successfully reduces exposure during periods of crisis, you’ll likely miss the worst days and the best days. But as the data shows, even missing the market’s standout rallies along with its biggest collapses can still produce a performance curve that’s smoother and, in many cases, outperforms the market on a risk-adjusted basis.
The key takeaway is that market timing is only a “loser’s game” if it’s done recklessly—entering and exiting on a whim or reacting to every market blip. A disciplined, rules-based approach that aims to step aside when volatility is extreme and re-enter when conditions stabilize is less about timing every gyration precisely and more about avoiding sustained drawdowns. While no strategy can guarantee perfect execution, the data makes one thing clear: by focusing solely on “don’t miss the best days,” investors overlook how much they stand to gain from also avoiding the worst ones. And in bear markets—where these massive up and down moves often happen side by side—any tactical approach must recognize that the two tend to go hand in hand.
Final Thoughts
Next time someone shows you a chart warning about “missing the best days,” remember there’s another side to the story. In the real world—especially during bear markets—risk reduction can mean skipping some breathtaking rallies and some devastating sell‐offs. The net outcome may well be superior to gritting your teeth through the market’s wildest swings. In short, when it comes to tactical allocation and market timing, missing both the best and worst days is often more realistic—and more beneficial—than the industry’s usual “stay fully invested” refrain would suggest.
Disclosure: The information contained in this paper is provided for general informational purposes only and should not be construed as investment advice, financial advice, or any other type of professional guidance. The strategies and viewpoints expressed herein are solely those of the author and are subject to change without notice. Historical performance data was derived from sources believed to be reliable; however, its accuracy and completeness cannot be guaranteed. The performance figures shown are hypothetical and backtested and do not represent actual trading results. Such results may not reflect the impact of market or economic factors that can influence investment decisions and results in real trading. All modeling is based on certain assumptions that may not hold under all market conditions. Real-life investment outcomes may deviate significantly from theoretical projections. Past performance is not indicative of future results. These charts and statistics are based on historical data and events. Future market conditions can differ significantly, and there is no guarantee that past patterns will repeat. Consult with a qualified financial professional before making any investment decisions. Always consult with a qualified financial advisor, tax professional, or legal counsel before making any investment or financial decisions.
References:
1. Timing the market: Why it's so hard in one chart - The Visual Capitalist, accessed February 10, 2025, https://www.visualcapitalist.com/chart-timing-the-market/ 2. SPY Historical Price Data: Yahoo Finance https://finance.yahoo.com/quote/SPY/history/