Negative Markets and Volatility Create a Perfect Storm for Investing Mistakes

Negative Markets and Volatility Create a Perfect Storm for Investing Mistakes

As we enter the second quarter of 2019 an important topic comes to mind, timing the market. If you have a crystal ball you can ignore this article and now would be the time to pull it out. In fact, if you have a crystal ball I would like to borrow it! For the rest of us it’s time for a reminder on the benefits of staying the course with your investment plan.

In periods of heightened volatility it’s common to get emotional about your investments, but sometimes being too emotional can lead to making mistakes. One common area of concern with negative market trends and market volatility is many people will start checking their account balance(s) more than usual, often daily. Just checking your account balance(s) on a more regular basis often prompts you to think you need to make changes. Checking numbers too often makes it difficult to accurately interpret trends; it puts too much focus on the “now” and takes the focus off of your long term investment goals.

During periods of volatility, a natural response can be to sell out of your riskier investments and seek safety in safer investments or cash. Unfortunately this can be a big mistake because often the best days occur close to the worst days during periods of market volatility. Here are some statistics to keep in mind:

  • S&P 500: 8 of the 10 best days in the past 10 years occurred within 1 month of the 10 biggest worst days.*
  • If an investor missed the 5 best days over the past 10 years, they may have lost 32% of their total return.*
  • Since January 1, 1998, 6 of the best 10 days occurred within two weeks of the 10 worst days.**

Take a look at the chart below. This chart shows data from January 1998 to December 2017, assumes you made a $10,000 investment on January 1, 1998 and shows the consequences of trying to time the market.

  • Some of the events that triggered fear for many investors in this time period include the tech bubble and bust, 9/11, the wars in Iraq and Afghanistan, the housing boom and bust and the great recession and recovery.**
  • After an initial $10,000 investment in the stock market, this investor stayed the course and in 20 years of being invested the account grew to $40,135.**
  • If an investor got out of the market and missed only the 10 best days in the last 20 years their investment return was slashed in half! Remember, the best days are often on the heels of some of the worst days, so this was a far too common mistake for many investors.
  • You can see the devastating outcome of missing out on more than the 10 best days by sitting on the sidelines for a prolonged period of time.

While diversification is important to a stable financial plan and future, you can’t reap the rewards of the market if you aren’t participating in it. Timing the market is not a prudent strategy for a financial plan, especially a retirement plan. Some of the best things you can do to weather the proverbial market storms are to save enough, diversify, rebalance and stay committed to your plan by staying invested.

As we go into the New Year and near the end of an economic cycle, I believe it is a great time to reassess your risk tolerance and make sure your investments line up with your risk tolerance appropriately. Many times by reassessing your risk tolerance you will find it is time to rebalance your portfolio, especially if it has been more than a year or two. This rather simple exercise can provide peace of mind and confidence in your financial plan.

*O’SHARES Investments. Data from Bloomberg as of 11/30/2018.
**Chart and comments from JP Morgan’s “Guide to Retirement”. Data from Bloomberg as of 12/29/2017.

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