Behavioral Advisor Perspectives and Practices: Stay Invested Through the Rocky Bottom
One of the biggest challenges for investors is staying invested as markets sell off. Every up and down swing creates strong emotional reactions and constant second guessing. Periods of high volatility can last for weeks or months and are emotionally draining. While it may feel like you are doing nothing by staying invested during these periods, you are likely avoiding costly mistakes by not compounding an already difficult situation.
There are several key reasons to stay invested after a sharp selloff. Most importantly, the long-term probability of the markets going up is much greater than going down once the selloff has occurred. In addition, there are large swings during these volatile periods, but the up days will almost certainly outweigh the down days over the long run. Missing out on just a few of these large moves up can result in significant underperformance when compounded over time. As you can see in the table below, most of the best single days in the post-1950 history of the S&P 500 came either during bear markets or immediately following major drawdowns.
Source: Charles Schwab, Bloomberg, as of 3/9/2020. This example is for illustrative purposes only. Bull and bear markets classified using rounded +/-20% changes in S&P 500. Note: March 2000-October 2002 and October 2007-March 2009 are considered bear markets. Past performance is no indication of future results.
Eight of the 20 largest one-day returns occurred during the 2008 Financial Crisis bear market, which was the deepest drawdown since the great depression. In the current 2020 bear market, we have already logged the third and fourth largest positive one-day returns at 9.4% and 9.3%. How many more will be added to this list?
Long-term investing is an uneven process that builds up wealth over time with periodic heartbreaking drawdowns, raging bull markets, and sometimes seemingly trendless years. Effectively navigating bear markets is the true proving ground of successful long-term investors.
Hindsight provides little value after the drawdown. The main goal is to make the best investment decision going forward. Although staying invested now is emotionally difficult, it can dramatically improve long-term results. Your future self will likely thank you for it.