You Should Stay Invested When Things Look Rough
It is tough to watch your investment accounts take a hit and not think, "if only I had put my money somewhere safer!" Or perhaps, "I should have locked in some of those gains before my luck ran out!"
Why would any sane person bother staying invested through a downturn or recession? Isn't it safer to get out of the market while things are bad, then get back in once it turns around?
It turns out that is exactly the wrong approach to take.
Trading in and out of the markets has been shown to have statistically lower returns than remaining invested the whole time. According to JP Morgan Asset Management, an investor who stayed invested in an S&P index fund between 1999–2018 would have averaged a 5.62% annualized return, while an investor who missed only the 10 best days would have seen a 2.01% annualized return. That's an annualized underperformance of 3.61% by missing only 10 days out of an entire decade! The article emphasizes that 6 of the best 10 days in that period occurred within just two weeks of the 10 worst days.
Furthermore, research shows that investors can increase the likelihood of positive returns by staying invested for longer periods of time. A 2018 report published by Morningstar shows that between 1926 and 2017, the risk of a stock market loss over any 1-year per averaged 26% (meaning 26% of the years – about one in four – had negative returns), while the risk of stock market loss over any 15-year period was 0%. In other words, over that period there was not one single rolling 15 year period with a negative return. By lengthening the holding period to 15 years or more, investors would have substantially reduced the risk of loss.
It is really, really difficult to see your investments drop and keep holding them for the long term. It is even harder to watch them drop and decide to add more of your hard-earned cash – which otherwise would be safe and secure in a bank account – to those investments. However, the best time to buy is precisely when it feels like the worst time, and the worst time to buy is when it feels the best.
If you sell when the markets are dropping, you will be selling exactly when lots of other people want to sell – and have to accept a lower price. If you wait until the market recovers to start investing, you will be buying when lots of other people want to buy – and be forced to pay a higher price. It is literally the opposite of 'buy low, sell high', yet it is the instinct most of us have.
You don't need to worry about finding the absolute bottom before you buy or sell at the absolute peak to be a successful investor. You don't have to be smarter than everyone else or have a complicated strategy. Statistics show that you can enjoy better long-term performance than most investors simply by staying invested and extending your holding period.
Iseler Financial, LLC | Registered Investment Advisor | Durham NC
Iseler Financial is here to simplify the process of building the strong foundation you need to achieve your goals and dreams. As both advisor and accountability partner, we help identify current strengths and weaknesses, clarify and refine your long-term goals and dreams, and prioritize understandable, manageable, and repeatable actions to bring long-term financial well-being. Reach out today to take the first step.