Janney’s Director of Wealth Management Research reminds us that if history is a guide, those who remain committed to their financial goals in the face of short term turbulence should reap the rewards in the end.
Investors have recently had the luxury of taking part in one of the longest sustained bull markets in history. With the exception of a few short periods, equity markets have consistently trended up since early 2009. Simply participating in the equity market has been enough to deliver returns in the mid-teens, on average, per year for investors. As all bull markets often do, this one has come to an abrupt end. With changing market dynamics in recent years, including the advent of high-frequency trading, widespread central bank easing, and the widespread rise of passive investing, it makes sense that this decline occurred faster than those we have seen in the past. (See Exhibit A below).
Avoiding common pitfalls during periods of stress
Now that the market has finally turned, it is essential for investors to remain disciplined and committed to their long term investment goals as actions made during periods like this can have drastic impacts on the probability of meeting those objectives.
These goals—whether it be saving for college or retirement, or for charitable giving or estate planning—are of utmost importance to investors and are the reasons why most participate in the market in the first place.
During this market correction, many investors may understandably face the urge to exit the market and sit on the sidelines until conditions improve. While this may sound appealing in theory, it rarely works in practice for several reasons.
History shows us that over time, market returns can be dramatically influenced by just a handful of trading days. It is difficult to predict when these outlier days may occur but often, they come right on the heels of a sharp drawdown. By exiting the market, investors risk missing out on those crucial days which, as the data in Exhibit B shows, can have a meaningful impact on long term results and one’s ability to reach their goals.
Additionally, exiting the market following a sharply negative trading day has repeatedly proven to be the most inopportune time to reduce exposure. Exhibit C shows the performance of the S&P 500 Index after its 15 worst trading days. With the exception of two days, the index experienced a sharp rebound in the period following those negative days. Those sitting on the sideline for any sizable portion of that rebound would have seen their long term performance suffer as a result.
Some investors may alternatively try to time the market by getting out prior to a market downturn, but this is not a practice we would recommend. Effective market timing is exceptionally difficult, even for the world’s most skilled investors.
A detail that sometimes goes overlooked is the fact that it must be a two-part decision: Not only do investors have to accurately time when to get out of the market, but they must also time when to get back in to partake in the subsequent rebound. By trying to time the market, investors not only risk getting out of the market too late and failing to avoid most of the downside, but also returning too late and missing most of the subsequent rebound. Attempting this can be a surefire way to underperform the market over the long term and undermine one’s ability to reach their strategic investment goals.
Keep your long-term goals in focus
Remaining disciplined and maintaining one’s exposure to the market during a downturn is no easy task and it can be difficult for all investors to stomach rising volatility and short-term portfolio losses. Nevertheless, we urge investors to remain focused on their strategic investment goals. These goals are best achieved through an unwavering commitment to one’s long-term investment strategy, not by market timing and avoidance of short-term losses. This discipline is more crucial than every during market downturns given the amplified effect the timing of decisions can have on performance. We believe those that remain committed to their goals in the face of short-term turbulence will reap the rewards in the long-term.
Janney makes no representation that an account will obtain gains or losses similar to those illustrated. There are distinct differences between hypothetical performance and performance achieved by actual trading platforms. Returns illustrated do not reflect any management fees, transaction costs or expenses Performance data quoted represents past performance and is no guarantee of future results.
The S&P 500 is an unmanaged, capitalization-weighted index. Performance figures assume reinvestment of capital gains, dividends, but do not include any fees or expenses. It is not possible to invest directly in the S&P 500.