With markets crossing into correction territory (10% sell-offs), it's easy to get anxious seeing your account balance rise and fall several percentage points each day. For well-prepared, long-term investors, now is a time to stay the course while evaluating potential opportunities as assets become oversold.
S&P 500 Biggest Declines and Following 12-Month Performance
It's tempting to try to time the market, but that requires two important timing decisions — when to sell and when to buy. A few small miscalculations of either move can have a significant impact on results. As seen below, missing out on just the market's top 10 performing days over the past 20 years would cut the gains on a $100,000 investment by about half.
In an ideal world, all investors buy low and sell high.
In the real world, investors often do the exact opposite—buy high and sell low—especially during volatile times. We see stocks going up and down because of the coronavirus or political uncertainty, and our brains say “run.”
Tempting? Yes. You’re trying to make the right decisions for the retirement and other investments your family is counting on. But in the long run, you’re generally better off staying the course rather than trying to jump out, then back into, the market.
That’s because it’s never about timing the market. It’s more about time in the market.
it’s never about timing the market. It’s more about time in the market.
Staying invested during market volatility.
During volatile times, it can seem (really) appealing to change how you invest in hopes of a better return. Let’s look at a case study of how timing the market could impact your retirement savings.
In 2008 and 2009, we experienced a period of extreme market volatility due to the explosive growth of the subprime mortgage market.
Case Study: Market Timing
Imagine it’s January 1, 2008, and you have $100,000 invested in the market, and the bumpy ride drops you down to $64,388 balance in one year.
You are frustrated by the declining value of your investment, you take that remaining $64,388 out of the market. You decide to go with a more “stable” investment, putting your money into a guaranteed interest investment (a CD) with a 2% return for the next five years. During those five years, with the guaranteed interest, your balance increases to $71,090.
But what if, in 2009, you decided to ride out the ups and downs and kept your money invested in the market instead? By staying in the market, based on S&P Index returns at that time, you would have had $123,862 after five years.
Bottom line: You could have had $52,772 more if you'd stayed in the market instead of moving your money into a CD.
Invest Like Warren Buffett - It's easier than you think
One of the most successful long-term investors is Warren Buffett. Buffett has generated annualized returns of 20.3% for shareholders since 1965. That's more than double the 10% annualized total return (i.e. dividends included) for the benchmark S&P 500.
Arguably the most powerful thing Warren Buffett does when it comes to investing is nothing. He buys stocks and then sits on his hands for many, many years. In other words, he lets compounding work its magic. The longer the investment horizon, the more powerful compounding can be.
He never bails out of investments just because the market is down. In fact, Buffet is historically known for only buying stocks during very large market selloffs.
Whether we're talking about stocks or socks, I like buying quality merchandise when it is marked down - Warren Buffett
This is one of my favorite quotes from Buffet because it levels out how you should think about investing. The stock market is the only place where people don't like to buy high quality merchandise at discounted prices. Everyone enjoys getting deals on quality goods and services and that is how you should look at investing. Your mutual funds own hundreds of individual shares of well established companies (like Microsoft, Google, Amazon, Apple, Target, Costco, Starbucks, Nike, 3M, Philip Morris, Home Depot, Texas Instruments, McDonalds, Xcel Energy, etc.), and all of these companies are built to grow so when the overall market is going down, these companies sometimes get discounted just because the overall market is going down and this presents a buying opportunity because we know that eventually the market will stabilize and prices will go back up.
The best chance to deploy capital is when things are going down - Warren Buffett
When the market is going down, everyone is fearful and instead of looking for new opportunities; they panic-sell their investments. Market downturns are the best time to invest more money in your diversified portfolio. Why? You are buying more at cheaper prices so when the market stabilizes in the future, you will have higher overall portfolio returns.
Ultimately, staying invested for longer periods generally tends to offer a higher return potential, simply because long-term investing increases the chance of positive returns.
Automate Your Investment Strategy
Adopting a regular investment strategy can also be useful. Investing regularly means continuous investment regardless of what is happening in the markets. When you make fixed regular investments, the price at which units are bought averages out, which in turn will smooth out the investment journey. The outcome of such a strategy can help to address some of the worry that comes with sudden drops in the market, or of buying when prices may seem too expensive.
On a final note, you must not let short term market fluctuations take over your feelings and dictate your long term ambitions. Ask yourself whether there have been any significant changes to your personal circumstances, investment objective, and risk profile to warrant a review of your original investment plan. If so, reach out to your financial adviser to guide you (schedule an investment review).
Kurt S. Altrichter, CRPS®
Fiduciary Advisor | President