We as 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.
What goes up must come down
We as 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 do, this one too will eventually come to an end. We may not know exactly when this end may come, and it is possible the
current bull market could continue for several more years; however, given its historically long duration, we are likely far closer to the end than we are to the beginning. With changing market dynamics in recent years, including the advent of high
frequency trading, widespread central bank easing, and the rise of passive investing, there are reasons to believe that this market downturn could be sharper and occur faster than those we have seen in the past.
Source: First Trust Advisors L.P., Morningstar
Avoiding common pitfalls during periods of stress
When this market does eventually turn, 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 long-term
investment goals. These goals—whether 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 to begin with. If we face
a market correction, many investors may 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 draw down. By exiting the market, investors risk missing
out on those crucial days which, as the data in Exhibit A shows, can have a meaningful impact on long-term results and one’s ability to reach their goals.
Source: BlackRock, Bloomberg
Additionally, exiting the market following a sharply negative trading day has repeatedly proven to be the most inopportune time to reduce exposure.
The Exhibit C shows the performance of the S&P 500 Index during and 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.
|Date||1-Day Return||1-Year Later||3-Years Later||5-Years Later||10-Years Later|
Source: First Trust Advisors L.P., Bloomberg. Performance is price return only. Returns are averaged annualized return, except those for periods less than one year, which are cumulative.
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 getting back in too late and missing most of the subsequent rebound. Doing this is 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 ever 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 noise will reap the rewards in the long-term.
This is for informative purposes only and in no event should be construed as a representation by us or as an offer to sell, or solicitation of an offer to buy any securities. The factual information given herein is taken from sources that we believe to be reliable, but is not guaranteed by us as to accuracy or completeness. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Past performance is not indicative of future results. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed within.