Click. Click. Click. Higher. Higher. Higher. And then all of a sudden you’re at the top of the roller coaster and about to start the first big drop.
Now as you are hurtling down with a face full of wind, what is your mind thinking and your gut telling you? – “Hold on for dear life and don’t let go!” or, “Now would be a really great time to unbuckle and try to get off!”
People sometimes compare the volatility of the stock market to a roller coaster because the market has its ups and downs. But besides the obvious, there’s a difference between investing and roller coasters – because the moment we are experiencing the biggest drop in the market, is the moment our mind and gut are telling us to jump OUT of the market. But with a roller coaster, you know that the best option is to hold tight and know it’s all going to be fine in the end.
Unfortunately, our portfolios are not equipped with seatbelts and harnesses to keep us from “jumping out of the market”. Wouldn’t it be great if we could have a seatbelt for our portfolio? And if we can’t create a physical one, can we look at how to best create a mental one?
Consider this: according to a recent JP Morgan study from the years 2000 – 2019, or roughly 5000 trading days, the return of the S&P 500 was on average 6.06%. If you missed the ten best days of market performance during that time, your return was only 2.44%. If you missed the top 20 performing days, your return for those 2 decades is only .08%! And the pain from missing even more of the best days in the market only amplifies.
Another study by Dimensional Fund Advisors found that out of the last 15 recessions in the US, the S&P 500 had positive returns just 2 years later in 11 of those instances (the exceptions being August 1929, May 1937, March 2001, and December 2007).
Last but not least, studies have shown that for every down day in the market, there are two up days. Hence the popular phrase, it’s not about timing the market, it’s about the time you have IN the market. Roller coasters are fun and useful here to explain a point, but if you are a homeowner, here is another analogy to help calm you during times of market turbulence.
What are the two days we (truly) care about how much our home is worth? First, the day we buy the home and second, the day we sell the home. All the while, on a month to month and year to year basis, the Redfin and Zillow estimates will go up or down based on market trends.
Now imagine going on Zillow or Redfin only to find that your home has lost 20% of its value over the last few weeks – what would you do? Call up the closest realtor and tell them to sell to the lowest bidder? Of course not! So what do we actually do? Probably grab an adult beverage and decide we aren’t going to sell our home just because it has temporarily decreased in value due to market conditions and we will wait until our home value has recuperated before you sell. Your home is a great asset, and we need to remember that you can think about your retirement portfolio in the same way.
When the market is falling, we get emotional because we think of worse case scenarios. “What if all of the hard-earned money that I have saved over the years goes all the way to zero. I can’t have that happen… I need to go to cash in my portfolio so I will at least have something left”.
In times of market declines, I implore you, please take a deep breath and know that the only way for the portfolio to go all the way to ZERO would be if every single company that you hold in your portfolio failed to exist at the same time. Not just that the company went bankrupt and restructured (a recent example of this is Hertz) but failed to exist like AIG and Lehmann Brothers during the last financial crisis.
I know that seeing your portfolio decline is always concerning, and especially during these unprecedented and emotional times. But by providing these stories and statistics, I hope you can see that investing during time of great uncertainty in the market is just part of the long game – and there’s still a lot of game to be played. So, sit tight and enjoy that adult beverage – your portfolio and retirement will thank you later!