When Markets Dip, Don’t Drop Out

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“Just stay the course. Don’t do something, just stand there. This is speculation that we’re seeing out there, and you can’t respond to it.” Jack Bogle, Vanguard Investment

When the market gets jumpy, so do many investors.

In periods of volatility, anxious stock market investors can be tempted to take money off the table, fearing a potentially major slide in their portfolio. Selling off stocks when the market dips and returning only when things calm down is emotional, not rational or successful investing strategy. Data has proven that over the long term investors are always able to overcome dips and recessions successfully.

Markets tend to overshoot in both directions,” the late financier Leon Levy wrote in his memoir, The Mind of Wall Street. “Just as we saw stock prices rise far above the value of the companies, we are likely to see the reverse. Stocks will then be undervalued, and there will be new opportunities for investors.”

“During the last 20 years alone, there have been 25 months (i.e. more than every tenth month) where the S&P 500 index dropped by more than 5% in a month, with the decline averaging -7.9% among those 25 months. Despite this, over this time period the annualized compound growth rate on the index has been +6.3% per year. “ Jakub Jurek, Wealthfront Advisers’ VP of Research explains.

The Charles Schwab infographic explains how staying the course during market dips can be healthier for an investor’s portfolio.

It considers three types of investors over the course of 40 years:

  • The Stalwart – a discipline investor who sits tight and continues to invest, no matter how the market is performing.
  • The Reactor – an investor who reacts and pulls his money out of a bear market. He continues to save 10 – 15 percent of his income in hopes recouping some of his losses, but didn’t invest it.
  • The Waffler – during a year with negative returns, a waffling investor will move all his money out of the market and will sit on the sideline in cash. And, if the market rises up after a few years, he would finally get back into the market.

“If you take money out of your accounts in anticipation over a market downturn, it’s hard to know when you should put your money back in,” says Celine Sun, Wealthfront’s Director of Research. “This means that most likely, you’ll miss the upside returns more than you’ll avoid the downside.” Exiting stocks amid a turbulent market may help assuage your anxiety, but you’re likely to miss out on substantial gains while you sit on the sidelines.

Stay the course

“Stay the course” is a phrase that means to continue with your current investment plan. Investing should be for the long term. The stock market will always have turbulence, so it’s important that you ride out market cycles. If you are invested in high quality equities and your investments are based on a solid financial plan, don’t sell anything that you wouldn’t sell when there isn’t crashing. The only exception is when it’s clear that a company or niche industry isn’t going to recover, and then it may be time to cut your losses.

“In the short run, listen to the economy; don’t listen to the stock market,” Vanguard Group founder Jack Bogle said during an interview in the midst of a rather severe market turmoil. “These moves in the market are like a tale told by an idiot: full of sound and fury, signalling nothing.”

Whether the market recovers quickly or years from now, the most important thing to remember is, it will recover. And so will you. According to Carlos Slim Helu, “Courage taught me no matter how bad a crisis gets … any sound investment will eventually pay off.”

References:

  1. https://www.schwab.com/resource-center/insights/sites/g/files/eyrktu156/files/Q120_When_Markets_Dip_fina%401x_72dpi_0.jpg
  2. https://blog.wealthfront.com/what-should-you-do-when-markets-dip-hint-nothing/
  3. https://www.marketplace.org/2009/01/05/history-rewards-stalwart-investor/
  4. https://www.forbes.com/sites/lizfrazierpeck/2020/03/12/three-things-to-do-during-a-stock-market-crash/?sh=185db9a54c78

Note: Investors simply don’t experience FOMO (Fear of Missing Out) as much as they experience FOLO (fear of losing out). Consequently, the fear of losing lingers far beyond the crisis period and investors are left worse off than if they had done nothing at all. For those investors who sold during a market crash, it is important that they get back into the market and not engage in the destructive speculation.

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