As I write this in October 2022, the market is down over 20% year to date and many investors are concerned, and rightfully so. Many clients and investors alike are asking, would I be better of just not investing and keeping cash?
Our opinion is that the market is forward-looking, not based on the present, and therefore it has already priced in what it expects to wrong. Therefore, the biggest risk is not that the S&P 500 will go down further, it is that it will one day, soon, rise and that you will have been out of it and missed it. The biggest risk is not being a participant in a 20% down market, it is not being a participant in a 100% up market. If you look at the history of the market and its best days, you will see that they cluster directly after a down market period, but missing any one or two of those days, could impact the growth of your portfolio.
Even missing one or two of those best days, can permanently cost you thousands of dollars in growth that you won’t make up. See chart below.
Therefore, if you are holding cash right now, waiting for the market to start coming back up to feel comfortable with investing again, I would say – deploy it and invest it right now and take advantage of this 20% sale/discount gif the market is giving you. The market always turns suddenly, and sharply, and nobody rings a bell with a warning as to when that is going to happen, so you need to be in the game, not on the sidelines to capture that.
Here are some other points relating to this:
Don’t run away from volatility – the key to success in a bear market is to have an investment strategy to manage the short-term volatility and to be able to continue to participate in the up market which is far more common, prevalent, and powerful than the bear market.
Don’t take too much stock in pundits, as no one knows what the stock market will do tomorrow or next week, so don’t pay attention to those pundits who tell you to bail out, telling you that you are naïve to stick with your plan. Great investors stay focused on the long term, and downside volatility is the price stock market investors pay for long term performance. There have been 26 bear markets since 1929, and all 26 have eventually given way to a bull market, and this one will be no different. Eventually.
View volatility as an opportunity – take advantage of the ability to buy discounted stocks while they are on sale.
The market is going to have a negative return about 1 in every 4 years. You can expect a drop of over 10% nearly every year. You can expect a drop of over 20% about every 5 years. Successful investors know this. If you can’t accept it, the stock market isn’t for you.
I hope this helps re-frame the paradigm as to how most investors look at the market into a more positive, and optimistic view that will serve you long term. Don’t follow the herd, lead the pack.
