Should I Stay or Should I Go?
With all the crazy movement in the markets over the last few weeks, I am posting a great article written recently by Dan Caplinger.
The Best Argument for Long-Term Investing in Turbulent Markets
Anyone can look at the performance of the stock market over the past 100 years and understand how powerful long-term investing can be. Amid all the ups and downs along the way, the value of stocks has consistently gone up, building wealth for those who've had a disciplined approach.
Actual investing isn't always that easy. It's one thing to understand in your brain that a strong recovery has followed every big drop in the past. It's a completely different thing to have the conviction in your heart that the current downturn will eventually follow the same path to recovery.
Missing the Best Market Days Will Cost You
Many investment professionals use a simple argument to urge clients to follow a long-term investing approach. This argument points at the cost of missing out on the best days of stock market performance.
One study from the asset management arm of JPMorgan Chase noted that the S&P 500 returned an average of 9.2% per year for the 20-year period ending December 2021. That's consistent with the longer-term average return for stocks. However, if you took out just the 10 best days in that 20-year period, your total return would've fallen by nearly half. Miss the 30 best days, and nearly all of your positive returns would disappear.
This concept holds true for even longer periods of time. A different study from Bank of America looked all the way back to the 1930s. In each decade since then, missing the 10 best days in the 10-year period cost investors a huge amount of return. In the 1940s and 1970s, it turned a healthy positive return into a substantial negative one.
Why This Trap Snares So Many Investors
When I first saw those studies, I immediately wondered what would happen if you missed the 10 worst days in the market. Predictably, returns went way up. The Bank of America study actually looked at missing both the best and the worst 10 days, and those total returns tended to be slightly higher than the actual return of the market throughout the period.
But here's the problem: Human nature doesn't work in your favor with market timing. Most people never think of selling their stocks when prices are going up. With the positive reinforcement of rising portfolio values, it's easy to be a long-term investor.
It's only when the market has already dropped that most people think about adopting timing. The danger there is that all too often, the best days in the market come on the heels of the worst days. Consider some great examples:
The stock market crash of 1987 saw the Dow drop 508 points to 1,739, or 23%. However, just two days later, the Dow jumped more than 10%, completing a two-day rise that recovered more than half of that lost amount. If you'd sold on Monday, you suffered the loss but missed the gain.
The financial crisis of 2008 included a couple instances of this phenomenon. An Oct. 9 drop of 679 points came just before a rebound of 936 points on Oct. 13. Another drop of 733 points on Oct. 15 got more than reversed by the Oct. 28 gain of 889 points.
Most recently, the pandemic-induced bear market of March 2020 saw several wild swings. The March 9 drop of 2,014 points preceded a March 10 gain of 1,167 points. The Dow answered the following March 12 drop of 2,353 points with a March 13 recovery of 1,985 points. Lastly, the 2,997-point decline on March 16 didn't produce an immediate bounce, but those who sold out missed the March 24 2,113-point rebound.
Notice that in many of these cases, the rebound didn't immediately claw back all the lost ground from the decline. Nevertheless, without the discipline to stay invested, you suffered the losses without the gains.
Better Days Will Come
Nor should you assume that the bounce will come days or even weeks after a decline. Some bear markets have taken years to play out. That's especially painful, and it puts even the most seasoned investors to the test.
However, the most difficult lessons are those in which you get a quick reminder of why panicking was the wrong move. The best way not to miss the best days in the market is not to let the bad days scare you out. That's easier said than done, but it's crucial to your long-term success in investing.