If you’re a bit confused by the stock market right now, you’re not alone. Back in January, a 23% sell-off seemed unthinkable to many investors, yet that’s exactly what the S&P 500 (^GSPC 0.19%) had dished out by mid-June. Then, as of mid-June, a 17% rebound seemed impossible. But that’s what the index has given us.
Clearly, multiple macroeconomic factors are creating a lot of volatility in the market as investors can’t seem to come to a consensus on which direction the economy is heading. As such, remaining on the sidelines for the time being certainly feels like a smart idea (at least until the dust settles and there’s more clarity regarding how things might be going).
But for investors with a true long-term attitude (planned holding periods of five years or more) toward investing, this line of thinking is not only unhelpful but can be outright detrimental to their portfolios.
By (or buy) the numbers
Admittedly, holding stocks when they are trading down as far as some are at the moment can be stressful. People are mentally wired to avoid risk when they can even if that means sacrificing a potential reward. In other words, investors feel better about not losing money than they do about not making it, even though most of them innately know stocks are the best long-term path to building real wealth. In light of the market’s recent swings, in fact, investors’ current fear of loss is seemingly greater than the fear of missing out on more upside.
The thing is that right now, the biggest risk to investors is missing out on more upside.
That’s not to suggest stocks can’t or won’t pull back from their recent gains; they may well do it. despite the 17% gain in just two months, there is still a lot of profit-taking potential on the table and we’re at a point in the year when the market’s lethargic anyway. The S&P 500’s average August gain is a mere 0.7%, according to data from Yardeni Research, while the average September logs a loss of 1% thanks to being the only month of the year where stocks are more likely to lose ground than not.
There’s an old English idiom that suggests a person not “be penny wise but pound foolish.” As the phrase applies here, it suggests that investors shouldn’t miss out on the stock market’s big long-term gains in their efforts to evade a little bit of short-term discomfort. That’s a particularly important premise to embrace right now, with many investors thinking about sidestepping the next short-term setback while others are considering jumping in right before the next bullish surge.
Theoretically, it’s possible to spot such swings. In reality, though, most investors just don’t time the market all that well. Indeed, not even most professionals can time the market’s swings with any sustained success. Standard & Poor’s regularly updated report card of the industry found once again that during the one, three, five, and 10-year stretches ending in December of last year, 85%, 68%, 74%, and 83% (respectively) of large-cap mutual funds available to U.S. investors underperformed the S&P 500 for each of those timeframes. If the trained professionals with access to mountains of data can’t beat the market…
Still not convinced? Consider that recent number crunching done by mutual fund company Putnam indicates that between 2007 and 2021, missing out on the market’s best 10 days would have more than halved your returns achieved when compared to just staying in the market that whole 15 years and taking your occasional lumps. Specifically, a $10,000 investment made in the S&P 500 as of the end of 2006 and simply left alone would have been worth $45,682 as of the end of 2021. If you happened to miss the market’s 10-best daily gains though, your investment would have only grown to $20,929.
Think bigger picture
Sure, there’s an upside to avoiding the market’s down days, its down weeks, and even its down months. The challenge for investors is, many of the market’s best days can materialize at times most of us don’t see coming. In fact, research performed by mutual fund company Hartford indicates that half of the market’s best days over the course of the prior 20 years have taken shape during bear markets.
So, take the hint. Unless your market timing is perfect (and nobody’s is), now’s as good of a time as any to get into or remain in stocks, or an index fund. The market may well be down a month from now, but the odds of it being down five years from now are awfully, awfully slim. By then, this year’s volatility won’t matter much, if it matters at all. The only thing that will matter then is not missing out on the surprising “up” days that are sure to take shape between now and then.