The market fluctuates. Like it or not, stock market volatility is simply a fact of life. Those fluctuations have been known to create an unrelenting sense of panic for many, followed by an urgent need to do something now! But what if the best move is to do nothing? What if staying invested in the stock market is the best move?
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Importance of Staying Invested in the Stock Market
To illustrate my point, let’s rewind a year. In 2018, the S&P 500 posted its worst year in a decade. Many, thinking they could outsmart the downward spiral, reacted too quickly and moved their positions to cash—at precisely the wrong time. Those who did saw approximately as much as a 19% intra-year drawdown*—the difference between the peak to trough price movement—causing irreversible damage to their retirement assets. What if those folks, instead, had chosen to ride the wave of volatility and uncertainty? What if they resisted the urge to act and did nothing?
Financial professionals in the wealth management consulting industry are tasked with the responsibility of helping clients create and implement an investment strategy that will yield a successful, fully funded, stress-free retirement. One of the most important pieces of advice we give clients to achieve this goal is staying invested. Why? Because staying invested will increase the probability of achieving optimal positive returns over the long-term within one’s portfolio.
A Bad Decision Can Negatively Impact Returns
In his blog article, Tune Out the Noise: Don’t Let Short-Term Volatility Dictate Your Long-Term Investment Decisions, Nick Spagnoletti, Jr., CFP®, wrote about the misguided strategy of “getting out until the markets ‘calm down,’” noting that “it only takes one or two bad decisions to irreparably damage your portfolio.”
Just one bad decision can have significant repercussions for your future.
The visuals below are strong and compelling and convey what a thousand words may not: lost wealth. Let me repeat what Nick said in my own words: If you reactively take yourself out of the market, you may do considerable harm to your portfolio. This points to the importance of staying invested.
In the charts below, red areas represent the lost value in a $1 million portfolio, established in 1995, that cashed out for just one year.
In Example 1, the portfolio moved to cash in September 2002 until September 2003. From 2002 through 2018, that move netted a loss in value of nearly $1.7 million. Similarly, in Example 2, moving to cash in February 2009 until February 2010 lost the portfolio over $3 million by 2018.
The year 2020 presented yet another unique opportunity for investors to make the same mistake amid the coronavirus global pandemic. However, this time with an approximate 33.93% peak to trough drawdown within the price movement of the S&P 500. When including dividend paying stocks, the drawdown was only softened by an approximate .014%, still leaving investors with a 33.79% drawdown.
But you may ask, what if there are changes to my financial goals and objectives? I recognize that various components of your retirement strategy may change over time based on family, career, life events and modified goals and objectives—and I expect you to make changes during those times. However, I encourage you to think twice about making changes solely based upon an emotional reaction to market volatility.
Considerations to Withstand Volatility?
When building your financial strategy, consider the following to help you withstand volatility:
Establish your long-term expectations at the outset of portfolio construction
The first critical element is identifying your appetite for risk. How comfortable are you with a particular investment in the context of a full market cycle? (A market cycle is the natural rise and fall of economic growth: The market expands to its peak, levels off because there is only so much room to grow, then contracts and eventually ends in a trough.)
If you have a high aversion to risk, your advisor may recommend less risky investment options, such as risk transfer tools, bonds, or other more secured assets. Regardless, these decisions should be reviewed during the investment strategy and portfolio creation stage, with the understanding that you, with your advisor, can review and amend them in the future.
A strategy you can stick with is the best strategy for you
Because no one can predict or has the power to control the market as an investor, you want to ensure that you at least have power over factors of your investments that you can control, such as expenses, tax liability, asset turnover, and your portfolio diversification.
Being comfortable with an efficient mix of portfolio ingredients under your control can give you greater confidence, make it easier to stay invested, and leave you well positioned for retirement when that day comes.
Trust in “long-term-ism”
History has shown that over the long term, the markets have been continuously pushed to higher highs, while in the shorter term, the predictability of market returns is diminished. Making tactical moves to leverage inconsistencies in the market, such as moving to cash to avoid further losses, is extremely difficult. More often than not, such moves are not cost effective and will be detrimental to your overall portfolio, as the examples above indicate. Also keep in mind, past performance is no guarantee of future results.
Final Thoughts on Staying Invested in the Stock Market
Likely your best bet to increase your return over time is simply staying invested and reaping the rewards of your trust and patience. After all, a thoughtfully designed retirement strategy is not built to react to what the market will do in a day, a week, a month, six months, or even six years. The objective is to reach a specified long-term goal.
This is a guest post by Andrew Despotakis.
BIO: Andrew Despotakis, CFP®, is a Financial Advisor at MACRO Consulting Group. For more information, visit www.macroconsultinggroup.com
Advisory services are offered through MACRO Consulting Group, LLC, a registered investment adviser with the Securities and Exchange Commission. MACRO only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.
The information, data, analyses and opinions contained herein do not constitute investment advice offered by MACRO Consulting Group and are provided solely for informational and illustrative purposes. MACRO Consulting Group, LLC shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analysis or opinions or their use. Please consult your financial advisor in regard to your personal financial situation, or reach out to us to discuss your individual needs.
*Calculated based on daily closing values of the S&P 500
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