No exposure, no upside — but avoid the worst

Long-term returns are concentrated in surprisingly few periods. Being out of the market at the wrong time is expensive — but so is being fully in at the wrong time.

What the chart shows

Over more than 30 years and 400 months:

• Invested all the time, $10,000 grew to roughly $300,000.
• Missing just the 10 best months cut the result by about two thirds.
• Missing the 10 worst months more than tripled it.
• Missing both still beat staying invested.

Two lessons

1. You need exposure. People who wait on the sidelines for the "right moment" usually miss the best months — which often come right after the worst, in the middle of a crisis. 2. The worst months come in clusters — mostly inside long downtrends such as 2000–2002 and 2008. That is where avoiding losses pays the most.

Nobody can pick individual months. But the worst months tend to happen when a market is already in a downtrend — which is exactly what a trend-following rule is built to detect. It stays invested in uptrends (and catches most of the best months) and steps aside in persistent downtrends (and avoids many of the worst).

Related: trend following explained

By Dr. Harry Hamann · 5 min read