Missing the Best and the Worst

Numerous marketing pieces circulating around the web show the detriment that trying to time the market can have on a portfolio. These pieces often look similar to this chart, which shows the cumulative growth of $1 invested in the S&P 500 ETF (SPY) assuming that a given number of best days are missed over the period from 1995-2014. Missing 0 days is equivalent to simply buying and holding SPY.

Best DaysHonestly, while this chart is technically accurate, it is a bit misleading. After all, if you were so skilled to miss all the best days, you could just invert your strategy – thereby identifying all the best days – and increase leverage on those days.

An equally misleading chart would be to show the returns from missing only the worst days:

Worst Days

This chart shows how much we stand to gain by missing the worst days. However, missing only the worst days would take as much skill (or luck) as missing only the best days.

But there is good news for a momentum-based approach…

Markets exhibit “clustered volatility,” which is a fancy way of saying that the big up days tend to coincide closely with the big down days.

So for strategies that seek to avoid drawdowns and the worst days of the market, the best days are often missed as collateral damage.

Best Worst Days Heatmap

But the net result of missing both the best and worst has historically been positive.

Best Worst Days

Looking at missing the best and worst days is an interesting exercise, but in all of our portfolios, the most frequently we would rebalance is generally weekly. So what happens if we simultaneously miss the best and worst weeks?

Best Worst Weeks

And monthly?

Best Worst Months

The process of missing only the worst days is like getting a 100% on a multiple choice test – you generally have to have nearly perfect knowledge, possibly paired with some good luck.

The process of missing only the best days is like getting a 0% on the test – you either knew every answer and did not choose it on purpose or were extremely unlucky. Both case are unrealistic in investing.

We do not claim to be able to time the market perfectly every time, but by using momentum to inform our investment decisions, our goal is for our models to learn enough about the current state of the market to identify the periods that are fruitful to miss.

We know enough about human behavior to know that we cannot fully understand human behavior. By focusing on periods of significant drawdowns, rather than on bad days, weeks, or months, we aim to sidestep the cycle of investor overreaction in both directions.


Let's talk "Year-to-Date"

We have a pretty arbitrary practice in the financial services industry: we reset the performance clock of portfolios to zero every January.

Consider this hypothetical scenario: it’s December and markets are up 20% for the year.  They even got a nice 5% pop in the last month.  The clock strikes midnight on December 31st.  We roll into January and the markets proceed to tumble -3% in the first week.

Headlines won’t call it a “healthy consolidation off of a terrific 12-month number.”

No.  Headlines will read: “A Bad Start to the Year.”


What the ETF just happened?

This morning's trade prints weren't pretty in ETF land.  Here's a few select favorites:

PowerShares S&P 500 BuyWrite Portfolio (PBP) – Halted at 9:30:46, 9:36:16, 9:42:16, 9:49:29, 9:55:16, and 10:03:35PBP


iShares US Preferred Stock (PFF) – Halted at 9:30:45PFF



Guggenheim S&P 500 Equal Weight (RSP) – Halted at 9:30:25, 9:36:15, 9:42:15, 9:48:15, 9:54:34, 10:00:15, 10:06:15, 10:12:15, 10:18:16, and 10:24:15

iShares MSCI USA Minimum Volatility ETF (USMV) – Halted at 9:30:56, 9:36:15, 9:42:15, 9:49:08, 9:56:08, 10:02:50, 10:08:55, and 10:14:39USMV


Just to be clear here ... some of these ETFs were halted within a minute of the market open.

What happened?  A mixture between people loading up with market orders at the open and a bunch of halts.

These halts are generally at the discretion of the exchange – not the ETF provider – and are called "volatility trading pauses."  The idea is to give market participants some time to digest what is going on, reflect, and ask the man in the mirror: "do I really want to hit that sell button?"

This wasn't limited to any one ETF sponsor – but occurred across a whole bunch of them.

My takeaways?

Market Orders + Open = Disaster

Market orders at the open is a recipe for disaster.  Please don't ever, ever, ever do it.  You don't want to be the person who got that -25% print because liquidity was so thin.

With ETFs, check iNAV

Your brokerage account won't always reflect reality.  When you log in and see your account down 15% because a bunch of ETFs you own have horrendous prints, you have to take a deep breath and look at iNAV.

iNAV – or intraday net asset value – tells you what the underlying basket the ETF holds is worth.

You can get it by going to Yahoo! Finance  and adding "^" in front of the ticker and "-IV".  For example, to get the iNAV of PFF, we'd enter "^PFF-IV".  Once we see that price has totally dislocated from iNAV, we need to ask ourselves: are the underlying liquid or illiquid?

With the Greece situation – with markets closed – the GREK ETF provided price discovery.  This morning, however, stocks were trading just fine – it was the ETF that was broken.

Markets are Totally Irrational

If market participants were rational, we wouldn't need halts.  Let me re-phrase that: if market participants were rational, halts wouldn't be effective.  The fact that halts exist and work should tell us all we need to know.

Humans will be human...


High Yield Bond Programs vs. Multi-Asset Income Portfolios


  • High yield bond programs can offer high income and strong total return in a risk-managed framework
  • In periods where high yield bonds are unattractive, however, these programs will sit on the sidelines, failing to generate income or returns
  • A multi-asset income portfolio has a larger investable universe, making it more rotational in nature
  • High yield bond programs and a multi-asset income portfolio may be a great complement to one another

More thoughts on Global Sector ETFs

I was recently quoted in and its sister publication, ETF Report, in an article titled Global Sector Investing in Early Stages.

The article discusses global sectors – and in particular, global sector ETFs – and why they haven't seen the growth of their domestic peers.

At Newfound, we use iShares' suite of global sector ETFs in our Risk Managed Global Sectors portfolio.  For the objective of the portfolio – to seek to materially participate in global equity growth while sidestepping material drawdowns – we believe a sector-based framework is the best framework for managing risk.

However, we also recognize there are many reasons why these ETFs have not seen traction.  And I think several were overlooked by the article.