Pullbacks and corrections are commonplace, and investors always say “this one feels different” until it’s forgotten in the next pullback. Since 1920, the S&P 500 has recorded a 5% pullback three times a year on average and a 10% correction once every year and a half, according to Fidelity Investments.
Corrections, as opposed to bear markets, often leave no lasting damage. According to
Schwab, since 1974, the S&P 500 has risen an average of 8% one month after a market correction and more than 24% one year after a correction. Investors see sell-offs as a way to rewind the valuation spring, while also shaking out coattail-riding stocks that
were not rising on merit.
According to Fidelity, from Jan. 1, 1980, through Aug. 31, 2020, if you missed only the best five days in the market your performance would be 38% lower for the time frame. It’s far better to focus on developing a strategy that you can stick with over the long run than trying to predict what the market will do on a day to day basis.
Many investors have the urge to tinker with their investments. This is especially true when the markets are volatile. Watching your holdings gyrate widely in value can make anyone uneasy. That helpless feeling causes many to want to trade more frequently or make portfolio tweaks or running to safety. However, sitting on your hands and not doing anything is usually the best approach.
During turbulent times, it’s crucial to avoid the big mistakes. Usually those missteps stem from succumbing to emotion (fear of loss) and doing too much, not doing too little.
Warren Buffett put it best when he said, “be fearful when others are greedy, and greedy when others are fearful.” As markets sell off or correct, it’s critical to focus on long-term time horizons. If you have available cash, it would be a great time to buy more stocks. Understandably, the act of investing more money after seeing your portfolio drop so dramatically is very difficult. The comments received by financial advisors included, “Why add money to something that keeps dropping in value?” and “Shouldn’t we cut our losses and move to cash?”
While every fiber of your being is telling you to run for the hills, reaffirming your strategy by adding money is generally the best decision when markets are in a selling frenzy or correction.
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