Missing the Market’s Worst Days Pays 7x

There’s the old adage that time in the market beats timing the market. But what would returns look like if you actually could time the market? 

One dollar invested in the S&P 500 in January 1988 would grow to $64.79 through the end of this July if left untouched, which is about an 11% annualized return, according to research from GammaRoad Capital Partners. If an investor missed the market’s 30 best days, that return would shrink to just about 6%. But if an investor avoided the market’s 30 worst days, that $1 would become $482.46, about a 17% annualized return. Advisors often try to impress the impact of missing the market’s best days upon nervous investors during market downturns as a reason to stay invested, but missing the worst days has a disproportionate impact compared with missing the best days. 

The conventional approach of staying fully invested during downturns so as not to miss the market’s best days “would make sense for an investor with an unlimited time horizon and an unlimited balance sheet,” said Jordan Rizzuto, managing partner and CIO at GammaRoad. “Just about every investor on the planet does not fit that category.” 

60/40 Can’t Come to the Phone Right Now

The classic 60/40 allocation makes sense during disinflationary periods, when bonds rise as stocks fall, but the math changes when that inverse relationship breaks down. “While it is marketed as balanced in the past three decades, in the current environment we believe we’re in now, that’s actually a concentrated risk,” said Rizzuto. “That’s not a diversified portfolio.”

In addition to Tidal’s GammaRoad Market Navigation ETF (GMMA), there are a handful of products on the market that seem to use tactical allocations to avoid bad trading days, per VettaFi: 

• The Ultra Risk Parity ETF (UPAR) uses leverage to balance risk across TIPS, US Treasurys, global equities and commodities. The fund has about $60 million under management and has gained about 10.5% so far this year, according to ETFDb. 
• The VanEck Long/Flat Trend ETF (LFEQ) similarly follows technical signals to adjust allocation between the S&P 500 and T-bills. It has almost $29 million under management and is up about 12.5% this year. 

Sit With the Discomfort. Achieving true diversification in this market environment requires a lot of short-term performance discomfort, with a portfolio “not looking like the passive index while it continues to march higher,” said Rizzuto. It also requires some professional risk “because a more diversified portfolio looks much less like most of the conventional model portfolios that are put out there right now.”