The Value of Staying Invested

Market volatility or the threat of an economic slowdown often leads to doubts for investors, which can cause them to pause or abandon their investment strategy, or even sell out of equities completely. But 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, before putting their money to work. Both of these decisions 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, meanwhile, are often rewarded with more attractive long-term returns. Even sitting on the sidelines in cash—what some consider the “safe” route—can lead to negative real returns when factoring in inflation, especially when compared with the 10.7 percent average annualized returns of the S&P 500 from 1970 through 2023.

Below, we take a look at what it means to time the market and offer data-backed reasons for why it doesn’t work. We also provide alternative investment strategies that investors can use to maximize returns despite periodic, and sometimes extreme, volatility.

What is “timing the market”?

Timing the market is a phrase that refers to making investment decisions based on anticipated price fluctuations.

In timing the market, investors will often sell out of their positions when they think that share prices will soon be lower or will buy into positions when they believe that share prices are set to rise. Alternatively, timing the market may involve moving from one investment, market sector or industry to another, again with the intention of predicting price action.

This strategy doesn’t often work out the way an investor hopes, which—as we’ll show you—is why staying invested is usually the better route.

Why doesn't timing the market work?

To understand why timing the market doesn’t work for the average investor, it’s important to look at the data. We’ve used historical data on the S&P 500’s performance to illustrate why it’s better to stay in the market instead of trying to time your exits and entries.

Stocks have historically climbed the wall of worry

Over our lifetimes, we have endured political uncertainty, recessions, social unrest and a pandemic that has shaped our country and the financial markets. 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 $241,270 by the end of2023, regardless of the dozens of crises we’ve seen in that timeframe.

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.

You run the 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 over 50 percent less than staying fully invested through ups and downs.

Put it another way: If you invested $100,000 20 years ago and left it untouched, your portfolio would be worth $638,289as of the end of 2023. If you missed those 10 best days, you would instead have $292,423.

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 the 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 46 years, intra-year declines for the S&P 500 have averaged 14.1 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 35 of the last 46 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 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.

A better bet: staying committed

Instead of trying to time the market, a better bet for most investors will be to stay invested for the long haul. Some strategies you might try to help you do just that include:

Investing in a diversified portfolio

A diversified portfolio, as part of an asset allocation based on your personal risk tolerance and investment timeline, can help you manage volatility and avoid wild swings in portfolio value during periods of market strife.

Dollar-cost averaging your investments

Worried about buying at the top? Dollar-cost averaging, which essentially means investing slowly over time to take advantage of an asset’s price fluctuations, can help you avoid this scenario.

Invest in funds

Exchange-traded funds (ETFs), mutual funds and target-date funds can all be great set-it-and-forget-it options for the average investor to maximize growth potential while staying invested.

Working with an advisor

Not sure what the ideal diversified portfolio should look like for you? A Northwestern Mutual financial advisor can help with this. By getting to know your unique financial situation—your risk tolerance, investment timeline and goals—an advisor can design a long-term portfolio to help get you where you want to be without needing to try and time the market for gains.

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.