VOLATILE STOCKS AND THEIR RECOVERY
The past two quarters have been among the most volatile on record for stocks. The benchmark S&P 500 declined by 19.6% in the first quarter, and then, in a surprising turnaround, went up by 20.5% in the second quarter.
We often suggest to clients that during times of market stress to step back, focus on the long term, and stay the course. But this can be hard to do. One has a sense that action needs to be taken, to get out of the market to avoid further loss and to re-enter later, when the future is clear and things are more stable.
But by deciding to sell, you are very often doing the opposite of what you should be doing, which is holding on for the recovery. And recovery, or at least strong rebounds, occur with much greater proximity than it feels like would be possible during the worst of any crisis. The steepest downturns provide the seeding grounds for the greatest upturns.
Just look at the past six months: one of the worst quarters of all time was followed by one of the best quarters of all time. On March 12, the S&P 500 fell by 9.49% (the second-worst day in 20 years); the next day, Friday, March 13, the market went up by 9.32% (the fourth-best day in 20 years).
Longer-term, if you review the twenty worst days going back to 1929, they are more often than not followed weeks, if not days, later by the top twenty best days in the markets.
Markets can be unnerving, but to react to a bad day or period can be harmful to your portfolio’s long-term value. You might feel better at the moment to have taken some action, but then you have to time the other side of the equation correctly to get back in. If you miss the market upswing, you will never make up that lost opportunity.
The chart below shows what happens if you miss the best days – the impact on long-term returns can be dramatic.
SHORT-TERM RISK VS LONG-TERM RETURN
The market on a day-by-day basis seems risky. And if you look at it on specific days or over short time spans, it can be. It has dropped 20% in a single day (October 1987) and 34% in three weeks (this past March). The average drop within any calendar year since 1980 has been almost 14%.
But despite those intra-year drops, returns have averaged 9% per year. The S&P 500 finished each of those years with a loss less than 20% of the time (i.e., over 40 years, the market closed the calendar year up more than 80% of the time). The odds are in your favor that your experience will be positive, as long as you hold on through the inevitable, short-term down swings.
The chart below shows the range of annual returns for stocks, bonds, and a balanced portfolio of stocks and bonds for various calendar year holding periods. The longer you hold the course, the more likely your returns are going to be positive.
All of this is telling us to keep things in perspective. The worst will pass and it will often do so more quickly than you can imagine.
The markets will do what they do. No matter how smart you are, you will never be able to out-predict the markets in any meaningful way. Let go of the emotion around market swings and focus on the long term.