The volatile tide of the stock market has made itself known once again. Here are some important reminders and notes from history that are important to remember.
Studies show that people place too much emphasis on recent events and disregard long-term realities. Even amidst a market downturn, remember that stocks have rewarded investors over time. Including downturns, the S&P 500’s mean return over all rolling 10 year periods from 1927 to 2015 was 10.46%.
Keeping your long term goals in mind is key to navigating turbulent times in the market.
Fear of loss is a common emotion among investors, driving many to buy and sell investments at the wrong time. People in general get emotional about money matters—especially when it comes to the possibility of losing it. According to the acclaimed, Nobel Prize winning Psychologist Daniel Kahneman, for most people, the fear of losing $100 is more intense than the prospect of gaining $150. Interesting isn’t it?
However, risk aversion can have its cost as well, above and beyond being a mere missed opportunity. Too often, emotion sparks irrational behavior, such as cashing out, chasing returns and jumping from fund to fund—essentially buying high and selling low, and locking in losses. A recent study by Dalbar, Inc. showed that the average equity investor returns lag those of the S&P500 by 3.66% due to emotional buying and selling.
Stock Market declines are a natural part of the investing cycle, but they are also the last things most investors want to experience. Declines have varied widely in intensity, length, and frequency. While in the midst of one, it’s nearly impossible to tell if you’re seeing a slight temporary dip in the market or the beginning of a more prolonged correction.
It’s hard to see your investments rise in value one day and decline rapidly the next. It’s even harder to see them go down day after day, and no strategy can guarantee positive returns. With that being acknowledged, here are some long term fundamental principles of investing, especially in difficult market environments that are important to keep in mind:
1. Invest regularly (investing a set amount each month)—in good times and bad; although this strategy doesn’t guarantee a profit or protect against loss, it’s one way to take advantage of a down market because you’ll have the opportunity to buy shares while prices are relatively low.
2. Avoid jumping in and out of the Market. Successful market timing is very difficult because it requires getting out at the right time and in at the right time. Instead, maintain a diversified portfolio.
$10,000 invested in S&P500 (12/31/02-12/31/17)
3. Don’t forget history. In the worst of times, it’s easy to forget that market declines, even steep ones, have been a natural part of the economic cycle. On average, the market has a 5% correction at least 3 times per year (we have not seen that in the last few years).
4. Don’t try to time the Market. Research has shown that losses feel twice as bad as gains feel good. Keep in mind that fleeing the market to reduce losses could mean losing out on gains when stocks recover.
5. The Market has shown resilience. EVERY S&P 500 downturn of about 15% or more since the 1930s has been followed by a recovery and the recoveries have been strong. Returns in the first year after each market decline ranged from 36.16% to 137.60% and averaged 70.95%. Over a longer term, the average value of an investment more than doubled over the five years after each market low.
6. Don’t miss out on Potential Market Rebounds. Although recoveries aren’t guaranteed, taking your money out of the market during declines means that if you don’t get back in at right time, you’ll miss the full benefit of market recoveries
History of Market Declines, Dow Jones Industrial Average, 1900-2016
The Bottom Line? Consider staying invested and not trying to time the market. Time, not timing, is what matters. Declines have been common and temporary occurrences. Declines can cause imprudent behavior by filling investors with dread and panic. Realizing that declines are inevitable and have not lasted forever helps provide perspective needed to stay the course.
“The market is the most efficient mechanism in the world for transferring wealth from impatient people to patient people.” -Warren Buffet