Here are a few good reasons to stay invested.
- Between 80% and 90% of the returns realized on stocks occur in less than 10% of trading days. The small number of days responsible for a large portion of market gains often coincide with periods of market volatility.
- According to a study published by SEI Investments and reported in the Wall Street Journal, since World War II stocks increased an average of 32.5% in the 12 months following a “bear market” bottom. If you missed being in the market at the bottom by just one week, that return falls to 24.3%,. Waiting three months after the market bottom cut the gains to less than 15%.
- From 1990 to 2005 a $10,000 investment would have grown to $51,354 had you remained fully invested beginning to end. However, if you had missed the best 10 days in that 15-year period, your returns would have dwindled to $31,994; if you had missed the best 30 days, you’d be looking at a mere $15,730.
- Nobel laureate William Sharpe found that market timers must be right an incredible 82% of the time just to match the returns realized by buy-and-hold investors.
- Between 1986 and 2005, the S&P 500 compounded at an annual rate of return of 11.9%. Due to market timing, the average investor’s return during that time was only 3.9%.
- If an investor missed just 40 of the biggest up days in the market from 1987 to 2007, their return would have totaled 3.98% versus remaining fully invested and achieving an average annualized return of 11.82%.
- The market research firm DALBAR went looked at the returns of mutual fund investors over the 20-year period, 1986-2006, and reported the average market timer return was – 2%. During this same time period, the S&P 500 Index returned 12%.
- Since the financial crash of 2008 Central Banks have shown their willingness, and their effectiveness, to “do whatever it takes” in support of the financial system. We can expect more intervention and presumably QE4 if there is another financial collapse.
A few other things to consider:
- After the crash of 1929 it took the stock market 23 years to return to the levels reached in 1929 (based on the DOW Jones Industrial Average).
- Despite all that has changed since 2008, financial markets (most notably debt markets) have grown larger and more complex than ever before. It remains to be seen whether this creates a more stable system or greater fragility, but we are seeing evidence of fragility.
Although it is almost impossible to remain comfortable during market volatility and even less so during a financial crisis, human instincts and fear often lead to the wrong decisions.
If an investor has thoughtfully diversified a portfolio based on a desired level of risk and time horizon it is likely that investors will do best by staying invested.