Financial Fiction Friday #6

CNBC Strikes Again

These outlandish statistics are pulled from a CNBC article which I assume did their math correctly. This fellow has his heart in the right place but he probably had precious little space to expand on his thoughts properly.

I want to address two important factors:

  1. This person is cherry-picking part of the results of the analysis, and

  2. The absolutism of "I DO NOT SELL MY INVESTMENTS...EVER" is a bad precedent

I've pulled in the chart from the CNBC article so we can all be on the same page. They do indeed say that missing the top 10 best days per decade would reduce your results from ~17,000% to just 28%. That is brutal. However, this assumes you have literally the worst luck of all time and still participate in the rest of the days. CNBC includes in their report that by missing the 10 best and 10 worst days of each decade you would earn a ~27,000% return. That is a very different picture than our friend painted. The truth is timing the market can work if you do it right, but let's be honest with one another, you can't.

It has been proven time and time again that for most investors trying to time the market just doesn't work in any medium or long-term time frame. Our friend is right about that.

I also take issue with his absolutist mindset about selling. Holding onto your investments for the long-term is the right idea but baking in sell discipline into your plan is prudent. If you invest solely in index funds, you may have less reason to sell than if you hold individual stocks since you may be well-diversified but even in those circumstances, tax loss harvesting in a taxable account is always an excellent reason to sell (and then rebuy something else).

When you own individual stocks or thematic ETFs for example, knowing when you should sell is as important (maybe more important) than knowing when to buy. If the thesis you used to buy a stock breaks, it's time to reevaluate. Company risk, political risk, governance risk, and many more are excellent reasons to sell positions when the winds change. Don't be so rigid in your rules that you can't introduce doubt into your own strategies and rework your plan. Adapt and change with the investing environment when necessary.

All Fiction