Losing is not anyone’s life goal. Yet one of the crazy things about investing is that you’re going to be more successful if you accept losing from time to time.
When stock values fall, a chillax attitude where you stay committed to your long-term investment plan and don’t make any emotional decisions to sell will help you end up with more money later.
Deciding to sell stocks when they are losing value is called market timing. On paper it looks incredibly enticing: Get out of stocks when they are falling, park your money in a safe savings account, and then jump back in when stocks are rising again.
There’s just one big problem: It’s basically impossible to pull off in real life.
Sure, it’s easy to bail once stocks start falling, but then you have just set yourself up for another challenge. When do you get back in? Miss even a few of the market’s best days and you’re going to be a lot worse off than if you just stayed invested.
That’s not an exaggeration.
Morningstar, an investing data firm, took a look at the 20 years through 2017, a stretch when there were 5,217 days when the stock markets were open. That 20 years includes two epically bad periods for stocks (2000-2002 and 2007-2009).
If you didn’t bail and stayed invested in an index of U.S. stocks for that entire 20-year period, your average annualized return was 7.2%.
But let’s say you sold, and as a result missed being invested in stocks for just the 10 best days for stocks between 2000-2017. Your return would have been cut in half, to 3.5%.
That’s not a typo. Just 10 days out of 5,217 were all you had to miss to lose out big time. If you missed the 30 best days, you would have had a negative return.
“There’s a saying that time in the market is what matters, not market timing,” says Allan Roth, a financial advisor in Colorado Springs, Colorado. “Follow that and you are going to do a lot better.”
Roth ran the numbers to see what would have happened to someone who invested a chunk of change back in October 2007 when stocks were at their highest point before the financial crisis hit. That’s the investing equivalent of showing up just as the party is breaking up. From that point through the worst of the financial crisis, a $1,000 investment in a broad U.S. stock index ETF fell to around $500.
Catastrophe? Not for a long-term investor who stayed invested. By mid-February of 2019 that original $1,000 investment that had sunk to $500 was now worth $2,300. So, even if you had the worst possible bad luck to invest at a market peak in 2007 you would now have a 130% gain. (For the record, if you had invested the $1,000 in a “safe” money market mutual fund in October 2007 it would now be worth $1,080.)
Roth suggests following the advice of Jack Bogle, the founder of the Vanguard mutual fund group whose championing of index funds and low costs made him the undisputed patron saint of individual investors. When stocks are falling Bogle’s advice was, “Don’t just do something, stand there.”
That would have worked well recently. Last December, U.S. stocks fell 9%. If you just stood there, your portfolio has already done some impressive bounce-back. Stocks are up more than 12% through the first seven weeks of 2019.
Not selling when stocks fall is indeed the secret sauce to long-term investing success. But there’s actually something you do want to do. Or rather, keep doing.
“A bad market represents incredible opportunity,” says Kristian Finfrock, a financial advisor in Madison, Wisconsin. “Not only should you not be selling, you should be buying more. When stocks are down it means they are on sale.”
Unless you are retiring soon, you’ve got plenty of time to buy at sale prices and then wait patiently as those share prices rise in value over time. Sticking to an automated dollar-cost-averaging strategy is a smart way to keep buying in a down market. (Case in point: If you’d made a $1,000 investment during the recession’s market low on March 9, 2009, it would be worth $5,600 today.)
“For younger people, a bad market can be the best thing,” says Finfrock.
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