When it Comes to Investing, ‘the best may sometimes be born from the womb of the worst’
Focusing investors on what they can control –how much and how consistently they save, and maintaining a well-diversified asset allocation– is key to a successful savings goal. And it’s NOT about timing your entry and exist from the market.
During periods of extreme volatility, this can all go out the window when emotions run high. Despite all of the educational efforts, investors may be tempted to take control in a way that is likely to be detrimental to them – by retreating or selling out of the market after a significant drawdown – locking in their losses and looking to re-enter when the market feels ‘safer’.
This behavior is driven by loss aversion – the desire to avoid additional losses that are painful. What most investors aren’t aware of is how closely the best days often follow worst, and how important those good days are to the recovery of an investment and savings portfolio!
How close really are the best and worst days?
Can be very close! As of year-end 2019, six of the best days occurred within two weeks of the worst days – but often the spread is much closer than that. Through April month-end 2020, the streak has been increased to seven with five of those best days occurring within just one week of a worst day.
This chart from JP Morgan 2020 Guide to Retirement can be very helpful in this conversation. It illustrates the worst-case outcome of this behavior to create clarity for the anxious investor. It compares the return experience of a $10,000 investment in the S&P 500 over the past 20 years to how that return is impacted by missing various numbers of the best days as a result of selling out and not being invested during the best days.
The outcome couldn’t be more telling! Or, we could say that ‘the best may sometimes be born from the womb of the worst’ when it comes to investing!
The lesson to be well learned from this is that, the only way to master the art of stock investing—low risk and high returns—is to take the time-tested route of long-term investing.
When the market is both bearish and volatile, you might wonder if it is more prudent to stay out of the market till it recovers. However, market timing is not easily achievable.
Over a sustained period of time, almost all investors profit more simply by investing immediately.
Investors learning how to invest in the stock market might also ask “when” to invest. Knowing when to invest, however, isn’t as important as how long you stay invested.
Trying to navigate the peaks and valleys of market returns, investors seem to naturally want to jump in at the lows and cash out at the highs. But no one can predict when those will occur. Of course we’d all like to avoid declines.
The anxiety that keeps investors on the sidelines may save them that pain, but it may ensure they’ll miss the gain!
Historically, each downturn has been followed by an eventual upswing, although there is no guarantee that will always happen. Trying to avoid risk could itself be risky, since it’s impossible to know when to get back in.
This is the Golden Advice for retail investors and long-term savers. For more insights, join our 3rd Arab Savings & Financial Literacy Conference held under the patronage of the Central Bank of Egypt , Financial Regulatory Authority FRA , and Ministry of Finance: https://fintechrobos.com/etn/arab-savings-financial-literacy-conference-2023/