Financial Planning

Should I stay, or should I go?

Wednesday, March 9, 2022

Between the pandemic, inflation, and geopolitical tensions, market uncertainty reigns right now. You might have heard some disturbing words, like shares “plunging”, prices “soaring”, and investment “volatility”. Many people, therefore, are asking themselves: should I take money out of the market and get back in when skies are clearer?

It’s an understandable reaction. Behavioural psychologists often talk about “loss aversion” or “negativity bias”. Both phrases essentially mean that people experience loss more intensely than gains. In other words, for every dollar you lose, you need to get back two to offset the emotional pain. Everyone talks about the fear of missing out, but the fear of losing is just as real.

Can you see the future?

Here’s the problem: no one knows what the market will do. Even the most experienced analyst or economist can only predict whether it will go up or down within a certain period based on the conditions they see at the time. Despite what some TV talking heads tell you, no one has a crystal ball. For example, did anyone really see the pandemic coming?

When you move money based on what you think will happen, you’re trying to “time the market”, something nobody in the history of investing has done successfully with any real consistency. And when you choose to exit the market, in effect you’re making two timing calls – predicting the market high (when you get out) and the market low (when you get back in). It’s a fool’s errand.

What if you tried to do the next best thing and rather than predict the stock market, you just react quickly? It’s not that simple. Stocks have a nasty habit of wrong-stepping even the most experienced investor – a declining market can jump before dropping again, while a rebound often hits speed bumps.

Counting the cost

When you get it wrong, you miss out on the market’s best-performing days. And there’s a lot of research to show just how costly that is.

In a 2018 report, Morningstar did an analysis to see how much an investor could have earned in returns by staying invested in the U.S. stock market from 1997 until 2017, which included 5,217 trading days. That number, it turned out, was 7.2%. But if that investor had missed the 10 best days in the market during that time, they would have earned only 3.5%. Miss 20 days, and their return shrank to 1.2%. If they had parked their money during the 30 best days, they’d have ended up with a -0.9% return. So, by sitting out only a month of the market’s best days in a 20-year period, an investor would have more than erased all their potential gains during that time.

In the same report, Morningstar looked at annual returns from 1970 until 2017, and analyzed how missing the best month of each year would have affected the year’s returns. It revealed that taking away the best 30 days of a given year could slash annual gains by more than half.

A February 2021 analysis from Brompton Funds, a Canadian investment fund firm, found that someone who stayed invested in the S&P 500 through the course of 2020 – including the bear market caused by the pandemic – would have been rewarded with an 18.4% return for the year. Missing the market’s best day would have cost them more than 10 percentage points, and not investing on the two best days would have turned their 2020 into an annual loss of -1%.

Here’s the kicker: the best-return days in 2020 happened in March, the same month when market fear was at its highest and many investors had already run for the hills.

How to stay invested

Let’s be clear: it’s a mistake to exit the market, even when it’s rough going. The question should not be whether you are invested but how you are invested, which depends on an individual’s stage of life and risk tolerance.

For example, let’s say you’re a young investor in your early to mid-twenties. You’ve got a job that pays a decent income, and you’re just hitting your stride in your professional and personal life. You’ve got decades before you retire, and are working on goals like travelling, getting married, getting your kids through school, owning a home, building a nest egg, and maybe even leaving a legacy.

For you, wealth accumulation is top priority, and time is on your side. Historically, the stock market has been up far more times than it has been down. You also still have a lot of earning potential and ability to recover from any dips in the market. You can afford to be bold and invest a bigger chunk of your investable portfolio in equities.

However, if you’re retired and, in your sixties, or seventies, you may be more focused on preserving what you have as you don’t have the parachute of time or a working salary. That doesn’t mean you exit the market at the first sign of trouble. Instead, you may benefit from being more defensive in your portfolio and asset allocation. Of course, the specific strategy will depend on the individual’s circumstances. An independent investment advisor will be able to assess the situation and help you navigate the storm.

They will also urge their client to stay invested – and that’s no trick or self-serving strategy. Frankly, ignoring that advice could wreck their retirement plans because missing out on just a few days could devastate a portfolio. Remember, time in the market beats timing the market, every time.


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