A friend texted me two weeks ago following another down week in U.S. markets. The concern and fear of a recession has mounted, and he wanted to know how to navigate the volatility.
"What should I do?" he texted.
"Nothing," I replied.
Soon we were talking about the importance of staying invested (if you own stocks you believe in). It's simply too difficult to time the peaks and troughs of the market. Even the professionals who look at charts all day long frequently try to time the market but end up underperforming.
If you do sell, there's a high probability you'll miss big gains. Which underscores why it's important to stay invested through market downturns, euphoria, bull markets, inflation, war, interest rate hikes, volatility, and more.
For example, if you started with $10,000 and stayed fully invested over the past 15 years, you would have earned $24,753 more than someone who missed the market's 10 best days, according to research from Putnam Investments. Trying to time entry and exit could prove costly, given some of the market's best days happen fast and often come without warning.
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History tells us that violent sell-offs are often grouped with sharp rallies
The U.S. stock market has been resilient throughout its history. Stocks routinely recover from short-term crises over longer periods. Even amid today's geopolitical tension, hawkish federal reserve and high global inflation, history tells us that sharp rallies are in store. By trying to time the bottom, for example, we could miss the best days that will ensue. There's no way of knowing when the best days will come, which is why it's critical to just stay in the game.
Say you invested $10,000 in 1980 in an investment that tracks the S&P 500 Index. Had you stayed invested through March 2020, you would have endured a number of volatile periods, including in 1987, 2000-02, 2008, and March 2020, the fastest bear market in history because of the COVID-19 pandemic. Yet that initial $10,000 would be worth around $697,421 today, according to Fidelity.
If you'd missed out on just the five best days over the same period, you'd have much less: $432,411. Miss out on the 10 best days? $313,377. And if you missed out on the best 30 days over the period, you'd only be sitting on $115,481, which is $581,940 less than you'd have had you stayed invested.
During volatile markets, it's difficult to focus on anything but the short term. But if you study past market responses, you'll find that patience is rewarded. It can simply be punitive to be out of the market on its best days. Moving in and out and potentially missing out on gains can be costly.
The power of staying the course
"Stay the course." It's common investment advice. In fact, it's so common that it could be viewed as a cliché. Yet it's true: Over the past 73 years, there have been 13 bear markets with declines averaging 25.8% before markets recovered, according to Putnam. Each time, the market recovered, and 14 bull markets transpired since 1949, lasting an average of 50 months and gaining an average of 136%.
By trying to avoid the worst drops, you very well could miss the opportunities for the biggest gains. The lesson here is that by pulling your money out of the market, even for a short time, you could miss out on long-term growth. Sometimes, the market is wobbly. Sometimes, prices decline sharply. Remember, the market retreats about 10% per year, 20% every five years, and about 30% once every decade or so (2008 and 2020 being the latest examples).
Realizing that downturns are inevitable has helped me navigate the turbulence. To fully reap the benefits of the market, you need a portfolio you can stick with through the declines. So it's important to research the right stocks in which to invest your hard-earned money. This means staying diversified, usually with at least 25 great stocks, and committing to holding them for at least five years to set yourself up for financial freedom. This also means sticking to your approach through the inevitable ups and downs of the markets, but also being humble enough to set aside some cash, or "dry powder," so you can pounce on the right opportunities.
The bottom line? Be patient. Stick to your plan. And stay invested so you don't miss the big green days that drive the bulk of the compounding. Over the long run, this approach has led to good fortune.
