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It’s a uncertain time to be in the stock market. This quarter the S&P 500 benchmark index tumbled more than 20% from its for the year peak (CNBC), a widely-accepted indicator of a bear market. The Fed raised interest rates four times for a total of 225 basis points (NY Times) — a harbinger of a tighter money supply, less corporate earnings, and even lower stock prices.  

In other words, don’t look for the volatility to end any time soon. The worst may be yet to come. 

Investors with heavy exposure to the stock market can be forgiven for considering abandoning their current allocation and battening down the hatches, taking money out of stocks and putting it into something less volatile, like cash or bonds. 

As powerful as the temptation may be, in all but the most extreme circumstances we recommend staying the course with your current asset allocation. If you’re long on stocks, don’t panic.  

It might not feel good to see a diminished portfolio value, but the consequences of shaking things up could actually be worse. By decreasing the temperature and weathering the storm, you may have a chance of coming out ahead. 

The Dangers of Investing Emotionally 

We’re all human. We have emotions, and those emotions can be hard to manage. Fear of loss can make us do unwise, irrational things. 

In particular, we tend to react to the data in front of us at the moment. We have a hard time taking the long view. Every market downturn feels like the first market downturn we have ever experienced.  

Caught up in the panic of the moment, investors forget that the market plummeted during the Great Recession of 2008, in living memory for most of us … only to rebound and surpass its pre-recession high by 2013. It also plunged during the COVID-19 lockdowns … only to rebound even higher. Even with the precipitous drops of the last few months, the S&P is above its pre-COVID highs and more than twice the pre-2008 high. (Yahoo! Finance)

In other words, even if you bought right before the Great Recession, you’re probably still ahead despite not one, not two, but three big dips. 

While humans have a hard time thinking long-term, computers don’t. T. Row Price charted market gains and losses since 1970 on an annual basis, and on a 15-year rolling basis, on the same chart. The annual bars swing wildly, including several years of dramatic overall losses … but the 15-year line stayed remarkably steady.  

In other words, over long timelines, the market has been a predictable grower for over five decades. 

It’s Nearly Impossible to “Time” the Market 

But what if the market goes even lower? Wouldn’t it make sense to get out now, wait for the bottom, and then get back in? Wouldn’t that be wise? 

The answer to that is almost always “no.” The reason is that market moves are almost impossible to predict. Oh, the financial industry tries … but they make a lot of wrong calls. The hard truth is that no one has a crystal ball into the stock market. 

In fact, by reacting to a downtrend, it’s actually very easy to miss an uptrend. In 2020, Blackrock, Bloomberg, and Morningstar studied the past 20 years’ of historical data and discovered that 24 out of the 25 worst trading days were within one month of the 25 best trading days.  

It would take a very active, very prescient trader to make two right moves — big moves — within a 30-day window like that. Most investors just aren’t that kind of trader. 

Investors Who Stay the Course Tend to Come Out Ahead 

These “best trading days” have a huge impact on the long-term outlook of a portfolio. Building on their findings, Blackrock et al calculated the impact on a $100,000 portfolio of missing out on a given number of the market’s best days. Here’s what they came up with: 

• Stayed invested: $324,019 — more than 200% gain over 20 years.
• Missed 10 of the best days: $161,706 — just over 60% over the same time period.
• Missed all 25 of the market’s best days: $82,256 — a loss over 20 years!

T. Rowe Price partnered with Standard And Poor to test their assumptions as well, modeling the returns of a so-called “anxious investor” — one who exited on the downtrends and re-entered on the up-trends.

They found that from a starting in 2001 with a portfolio value of $200,000, the “anxious investor” barely cracked $300,000 after 20 years, while the “stay-the-course” investor was sitting at over $1.7 million. 

In short, although it can feel like you’re losing money, you’re actually much more likely to come out ahead if you stay the course.  

Gradually De-Risking Your Portfolio Through Phases of Life 

This is slim comfort to people approaching retirement age with heavy exposure to stocks. This is why we recommend gradually de-risking your portfolio in phases, transitioning to greater allocation of bonds and cash as you approach retirement.  

Questions about staying the course vs. reorganizing? Reach out to J&G Associates for an honest assessment. We will tell you straight-up if you’re allocated correctly or should consider a course correction — and exactly when and how to do that.