Staying Invested During Market Volatility
As many of us experienced while playing sports as kids, the heartbreak of losing can be much more emotional than the excitement of winning. The same can be said about our personal finances: “It’s worse to lose $5 than it is to gain $5”. This is called Loss Aversion, the tendency to prefer avoiding losses to acquiring equivalent gains. While this is a common and understandable feeling, it can be a serious detriment when making decisions during market downturns. Here are 3 things to remember during these moments.
1. You must resist trying to time the market! According to the J.P. Morgan Asset Management Guide to Retirement 2020, staying fully invested in the S&P 500 between 1/1/2000 and 12/31/2019 resulted in an average annual return of 6.06%. Missing the 10 best days lowered that to 2.44%. Missing the 20 best days lowered it further to 0.08%, and so on.
2. A lot of the worst days in the market are often quickly followed by some of the best days. This trend can be traced back to the Great Depression, through the 2008 Financial Crisis, and right into the 2020 Coronavirus Pandemic. Here are a few examples of the performance of the S&P 500 during these periods of market volatility:
- -12.34% on 10/28/1929 and -10.16% on 10/29/1929 followed by +12.53% on 10/30/29 and +8.95% on 11/14/1929 (1-2 weeks later)
- -20.47% on 10/19/1987 followed by +9.10% on 10/21/1987 (2 days later)
- -7.62% on 10/9/2008 followed by +11.58% on 10/13/2008 (4 days later)
- -9.04% on 10/15/2008 followed by +10.79% on 10/28/2008 (13 days later)
- -9.51% on 3/12/2020 followed by +9.29% on 3/13/2020(1 day later)
- -11.98% on 3/16/2020 followed by +9.38% on 3/24/2020(8 days later)
3. Think long term! These short-term disruptions are likely to have a small effect on your long-term performance. By combining patience and discipline with a diversified investment strategy, your long-term goals can easily be met.
Don’t hesitate to contact us if you need a behavioral financial coach in your corner!