A Good Reason Why You Should Stay Invested Despite the Bloodbath – Yahoo Finance
Posted: February 29, 2020 at 4:45 am
Keeping calm when markets crash is easier said than done. It is human nature to be fearful when things look bad and the outlook suddenly becomes bleak. Today, Mr. Market (as Benjamin Graham puts it) is testing the patience and courage of investors once again. The Dow declined more than 1,000 points twice this week, making it difficult for investors to keep a clear head.
Source: CNBC.
American stocks have declined for seven consecutive days, and according to Bloomberg data, February 2020 is on its way to becoming the worst month since December 2018.
Source: Bloomberg.
Both the Dow and the S&P 500 Index were down over 10.5% as of Thursday, making this week the worst since the days of the financial crisis.
If ever there was a need to reiterate the importance of staying invested in equity markets, it's now. Investors need reassurance that things will return to their normal state soon, but right now, there's panic.
SunTrust Chief Market Strategist Keith Lerner told Bloomberg on Friday:
"Investors are selling stocks first and asking questions later. We are seeing signs of pure liquidation. 'Get me out at any cost' seems to be the prevailing mood. There is little doubt the coronavirus will continue to weigh on the global economy, and the U.S. will not be immune. There is much we do not know. However, it is also premature to suggest the base case for the U.S. economy is recession."
While that might provide some relief to investors in the sense that a renowned market commentator does not believe a recession is in the cards, investors need something more concrete than that to remain bold and go against the grain.
For 120 years, there has been one clear winner
Credit Suisse Research Institute released an important set of market data spanning 120 years, confirming that none of the popular asset classes could match the returns provided by equity markets. The report, prepared in collaboration with professors from London Business School and Cambridge University, revealed the following performance statistics.
Asset class
Annualized real return between 1900 and 2020
Equities
5.2%
Bonds
2%
Treasury bills
0.8%
The significant outperformance of equity markets reveals one thing: the risk-reward factor is always at play and as an economy grows, so will the stock markets. The ride is not always smooth, however, and there will be speedbumps along the way.
Trying to time the markets is a costly mistake, as Warren Buffet told CNBC earlier this week:
"There have been seven Republican Presidents after that (since buying his first stock at the age of 11) and seven Democratic Presidents and I have bought stocks under every one of them. I haven't bought stocks every day, there have been a few times I felt stocks were really quite high, but that is very seldom."
Further elaborating on his investment career, the guru said that he has bought stocks each year since making his first investment at a very young age. This highlights one important action that could deliver long-term success to investors; buy stocks when they are seemingly cheap, regardless of the macroeconomic or geopolitical outlook for America in the coming years. The country has survived many recessions, epidemics, property market bubbles and two World Wars. None of this could materially impact the long-term performance of stocks, however. Right when it looked as if things would never recover, American markets surprised investors.
Changes in investor sentiment could result in significant volatility in stock prices. However, none of this would likely matter in the long term as much as staying invested does. Numbers don't lie, at least not as much as sentiment and gut feelings do.
Story continues
One more reason to stay calm
Even though many investors might not be aware of this, missing just a few market days could completely erode the profitability of a portfolio. As surprising as this might sound, empirical evidence proves it. In 2019, JPMorgan Asset Management conducted a market performance review to evaluate this phenomena, using data from Jan. 1, 1999 to Dec. 31, 2018.
Source: JPMorgan.
Liquidating a portfolio and waiting for a better time to get in is a common strategy used by fearful investors. However, if such an investor failed to time the markets, which is almost a certainty, and missed just 20 days that ironically happened to be the best days of the market, he would have ended up losing money even though the market performance was positive in this period. What is even more interesting is that investors can never know with any degree of certainty when a bear market will turn bullish.
There's only one way to avoid making this mistake: to remain invested even when markets are crashing. Even though the rational decision might seem to be turning stocks to cash and parking in an interest-bearing account, the numbers prove this is a costly mistake. If, however, an investor had a mechanism to predict the best 10, 20 and 30 days of the market in advance, it would be best to liquidate and wait for such sunny times. But not even institutional investors have been able to decipher such a way to do this, even with the massive advance in quantitative analysis techniques.
Takeaway: Be patient
There's enough data to suggest that trusting U.S. markets even when they are crashing is the right decision. The best way to do this during trying times is to avoid constantly checking stock prices and the value of an investment portfolio as the mostly red numbers might prompt investors to act irrationally. Staying calm and patient is the key, and the market will do its magic as time passes by.
It seems appropriate to end this analysis with something Buffett told CNBC in 2016.
"If you had a chance to buy into a good company in your hometown...and you knew it was a good company and knew good people were running it, and you bought in at a fair price, you wouldn't want to get a quote every day."
Disclosure: I do not own any stocks mentioned in this article.
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A Good Reason Why You Should Stay Invested Despite the Bloodbath - Yahoo Finance
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