Investors tend to see short-term volatility as the enemy. Volatility may lead many investors to move money out of the market and “sit on the sidelines” until things “calm down.” Although this approach may appear to solve one problem, it creates one big problem with several ramifications.
WHEN DO YOU GET BACK IN?
To have this work out well for you, you need to be correct on timing the market getting out and coming back in. According to JP Morgan Asset Management, over the past 25 years, just missing the 10 best days in the market would have resulted in a portfolio approximately half the size of a portfolio that stayed fully invested.
By going to the sidelines you may be missing a potential rebound. This is not historically unprecedented. In fact, the recent record setting decline in January continued into February. But then throughout March, the market recovered almost all that was lost in the previous two months. The S&P500 started the year at 2043. The recent decline ended on 2/11/16 with the S&P500 taking a deep breath at 1829 and turned around on a dime. As of last Friday (4/1/16), the S&P500 has risen to 2072, slightly above where it began the year.
Per Charles Schwab and Company, between 80% and 90% of the returns realized on stocks occur in less than 10% of trading days. So, if you're out of the market when stocks resume their march upward, your long-term returns may suffer significantly. By going to the sidelines you could be not only missing a potential rebound, but all the potential growth on that money going forward.
Nobel laureate William Sharpe found that market timers must be right an incredible 82% of the time just to match the returns realized by investors who stayed invested.
Bottom line: TIME is much more important than timing when it comes to long-term market success. I know it seems tempting to some – to get out of the market when the market is falling and to get back in when things get better. The problem is that you never know when things are better until stocks have already skyrocketed. Before you make any rash decisions, talk with your trusted advisor and review your plan. From there, decide if any action is indeed necessary. This will satisfy the natural desire to “do something”, while keeping emotions in check.
Intra-Year Declines vs. Calendar Year Returns
Volatility is not a recent phenomenon. Each year, one can expect the market to experience a significant correction, which over the last three decades has averaged approximately 14%. Although past performance is no guarantee of future results, history has shown that those who chose to stay in the game were rewarded for their patience more often than not. When you get concerned about your portfolio or the markets, don't be afraid to contact your trusted advisor. It's the best thing you can do. We, acting as fiduciaries, are here to help you make wise decisions - that are in your best interest.