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Salesmen, Marketable Market Facts, and Investing Truths

At some time in their investing lives, most people will hear that 80% of the gains in the market are made in 2% to 7% of the trading days in a calendar year.  While few veteran investors will argue with the veracity of this statement, some object to the contexts in which it is made and to the motives of those who make it. Asset gatherers, for example, have an obvious interest in keeping clients invested at all times, and the 80% rule certainly helps them to make the case that average investors should stay in the market no matter what.  Trailing commissions that increase in proportion to the time that clients remain invested in a fund further encourage dealers and financial advisors to overemphasize the 80% adage.

Another issue with the 80% rule is its misleading presentation as an isolated fact.  When viewed without a context, it doesn't tell the whole truth about rebounds, bear markets, and how traders trade.  As a result, it begs the questions of when 80% of the losses occur and why investors shouldn't avoid the market to avoid losses on those days (the corollary argument to staying invested for gains on 2% to 7% of the trading days).  Furthermore, should investors remain exposed for the sake of those ten winning days in a year even in a year when the market falls by 35% and drags every portfolio down with it?

Another reason that traders object to the 80%-of-the-gains adage is that it sounds like an argument against short-term investing even when it's used to make an unrelated point.  Contrary to popular belief, successful traders don't make big bets based on one or two market timing decisions.  Therefore, the odds of a trader being out for the ten best days in a year are much lower than many investors and advocates of buy-and-hold imagine in their wildest day-trading dreams.

Ultimately, marketable market gems like 80%-of-the-gains, sell-in-May, and don't-try-to-catch-a-falling-knife should be subjected to as much scrutiny as anything else that pundits or salesmen advance as 'investing truths.'  With experience, most investors return to the old-fashioned fundies, and as a result, sometimes find themselves lightening up during an uptrend.  Adages don't deter them from keeping a little powder dry or buying common stock in June. 

And some successful investors even live long enough to catch a falling knife in their bare hands.