The market takes a lickin’ but keeps on tickin’
When market volatility spikes and returns drop, it can test investors’ nerves, especially new investors who haven’t yet experienced heavy market turbulence. Many will be tempted to sell, fearing that the market will just keep slipping. But before you take your ball and go home, remember this: Volatility is normal, and historically the market has always recovered from even the most nail-biting drops and gained new ground.
As a result, investors who stay in the game have a greater likelihood of winning in the end. So when volatility rattles your nerves, envision the kitten poster from your third-grade classroom and “Hang in there.” The market will usually reward your patience.
Perspective is everything: market volatility over time
Putting volatility in context can help you maintain your risk composure. The market’s average annual pullback (temporary decline) is -14%, higher than the recent pullback of -10% (during the fourth quarter of 2018). And while every year experiences some level of pullback, most years still end on a positive note. Even when the pullbacks are big!
For example, in 1998, the market was down -19% at one point, before ending the year up 27%. Imagine missing those gains because you jumped ship when the market was down -19%?
Staying the course leads to gains
That leads us to our next point: You could miss out on cold hard cash if you try to time the market (meaning, get in and out at the right times). As shown in the chart below, if you’d invested $1,000 and stayed invested through the market’s best days over the last 25 years, your $1,000 would have grown to $5,690.
But if you’d exited the market after a volatility scare and missed even 10 of the best days before reinvesting, you’d only have about half that. It’s impossible to predict when the market’s best (or worst) days will happen, so staying invested and toughing out the worst days is the only guaranteed way to benefit from the best days.
Chart 1: Staying invested through the market’s best days
Source: Clearnomics, Standard & Poor’s
Reactive investors typically lose money
Trying to time the markets puts you in reactive mode. Not only do you have to pick an exit point, you then have to find a re-entry point. And it rarely works out, as this chart illustrates. It shows the negative effect of selling your investments immediately after the worst market days since 2009 and staying out of the market for various periods (shown on the bottom axis).
For example, if you’d invested $1,000 in 2009 and stayed invested, it would have grown to $3,852 by now. But if you’d jumped out of the market after one of the market’s worst days and then returned after just three months, you’d have only $2,603 today. Losing your composure would have cost you $1,249 in potential gains in just three months.
Chart 2: Market timing doesn’t work
Source: Clearnomics, Standard & Poor’s
Staying invested in a balanced portfolio is the best course of action
The simple conclusion is that unless you have psychic powers and can predict market conditions (something even the best fund managers struggle to do consistently), you’re much better off staying invested. Jumping out of the markets when the ride gets rough increases the likelihood that you’ll miss out on significant money.
With a long-term game plan and a balanced portfolio of stock and bond ETFs, you’re in a great position to weather any storm and enjoy the rainbow (and maybe a pot of gold) when the sun returns.
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