Market volatility or the threat of an economic slowdown often leads to doubts for investors, which can cause them to pause their investment plan or even sell out of equities. Despite the pessimism, dire predictions and calls of “this time it’s different” that usually accompany downturns, the stock market has always recovered and reached new highs.
During periods of market volatility investors often question whether staying in the markets is the right move. Unfortunately, some take a short-term perspective and let their emotions dictate their decisions, or they choose to sit on the sidelines, waiting until things settle down, both of which can lead to years of regret. It’s important to remember that when it comes to investing, consistency wins the race. Time in the market is more important than timing the market.
Selling in a falling market may lock in losses that can take years to recover from. Investors who stick to their financial plan despite periods of volatility are often rewarded with more attractive long-term returns. Sitting on the sidelines in cash can lead to negative real returns when factoring in inflation, compared with the 10.4 percent average annualized returns of the S&P 500 from 1970 through 2022.
Stocks have historically climbed the wall of worry
Over the course of our lifetimes, we have endured political uncertainty, recessions, social unrest and, most recently, a protracted pandemic that has shaped our country. Despite the wall of worry those events created, the stock market persevered — since 1970 the annualized total return of the S&P 500 is over 10 percent. Investors who took the slow and steady approach by investing $1,000 in 1970 would have had $191,048 by the end of 2022.
There will always be a seemingly compelling reason to sell out of the market or to try to time your entry point back into stocks, but history has shown that investors who have stayed invested have been rewarded.
Risk of missing the best days in the market
Investors who try to time the market run the risk of missing periods of exceptional returns, leading to significant adverse effects on the ending value of a portfolio. In fact, missing just the 10 best days over the last 20 years would have caused an investor’s portfolio to return almost 50 percent less than staying fully invested. Put another way: If you invested $100,000 20 years ago, it would be worth $627,548 as of the end of last year. If you missed those 10 best days, you would have $287,503.
When the markets are down, deviating from a long-term investment strategy can increase the odds of missing the best days. The reason for this is volatility tends to cluster. The best up days and worst down days tend to occur near each other. In fact, of the 50 largest single-day stock market gains during the past 20 years, 47 of them occurred during bear markets. So even if you are lucky enough to miss one of the bad days, odds are that you will also miss some of the good days. Missing those strong days can have a significant effect on your long-term investment performance.
Volatility is a normal function of the stock market
Historical annual returns paint an interesting picture of long-term trends. It is not unusual for the market to see substantial downside volatility. Over the past 30 years, intra-year declines for the S&P 500 have averaged 14.2 percent. While this volatility can be unnerving, it is far from unusual. Despite these short-term fluctuations in performance, the stock market has ended the year in positive territory 34 of the last 45 years.
In addition, our analysis shows that taking a longer view increases the likelihood of positive returns. As your investment holding period increases, volatility and returns tend to normalize, resulting in a more predictable investment experience. Consider this: If you invested in the stock market during any month since 1926, the returns on that investment five years later would have been positive 87 percent of the time. Those are phenomenal odds for those willing to stay invested through periods of volatility.
Respecting, not fearing, volatility can help you maintain the investment discipline needed to reach your financial goals. A comprehensive financial plan constructed to your risk tolerance and time horizon can help you weather the unexpected. Remember, volatility is the price of admission for access to the gains the stock market can produce — and no one gets in free.
The fact is, wealth isn’t generated only when times are good but also by the decisions you make when the markets are under pressure. While others feel the need to react to the daily drip of news and speculation, we’re able to tune out the noise. Our ability to remain steadfast and use it as an opportunity for growth — helping capture the upside when the markets eventually recover — comes from our longstanding commitment to drive value over time. We’ve seen that playing the long game tends to win, generation after generation.
Charts are for illustrative purposes only and not intended as a recommendation. Past performance is not a guarantee of future results. All investments carry risk, including potential loss of principal, and no investment strategy can guarantee a profit or completely protect against loss. Indexes are unmanaged and cannot be invested in directly.
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