Prudent investors should invest with a long term perspective and resist the urge to time the market, or move to cash with the intention of reinvesting only when the markets begin to rise again.
The first four months of 2009 proved to be extremely volatile for investors, with the market moving significantly down in the first two months of the year before beginning to recover. The Dow Jones Industrial Average had its worst January ever and worst February since 1929 before rallying for a gain of approximately 20% in March and more than 7% in April.
This spring’s rally is being fueled by some encouraging signs of life for the economy. Some financial institutions reported better than expected profits for the first quarter, near record-low interest rates enabled borrowers to refinance debt, home sales increased, and consumer spending and other economic reports weren’t quite as weak as they were this winter.
Still, many investors are cautious about a market that has been so volatile in 2009, that it has already included both a bear market (loss of at least 20%) and bull market (gain of at least 20%) in just four months. During these volatile times, as an investor, you should try to refrain from focusing too much on what is happening today, and instead focus on maintaining a long-term view of your portfolio. Focus on what you can control, and understand that on the heels of every past bear market comes a time of incredible market opportunity. In fact, since 1932, the S&P 500 has gained an average of 46% in the year after stocks have hit a bottom.
This historical data tells us that the markets will rise again; it just doesn’t tell us when it will happen or if, in fact, we have already experienced the market bottom. That is why prudent investors should invest with a long term perspective, and resist the urge to time the market, or move to cash with the intention of reinvesting only when the markets begin to rise again.
Research has shown that investors who have remained invested during past downturns experienced better portfolio performance in the long run than those who cashed out at the bottom and waited to reinvest. A recent T. Rowe Price study revealed that those who stayed invested during the last market meltdown in 2002 had nearly twice the portfolio value five years from the market bottom compared to those who moved to cash.
The study also showed that even missing some of the market’s best few days of performance can impact portfolio returns in the long run. The average annual return in the 15 years from 1993 to 2007 was 10.5%.1 Missing the best 30 days of market gains over this same period resulted in the average annual return dropping to 2.2%. Missing the best 60 days would have resulted in an average annual loss of 3.2%. It pays to stay invested.
The lessons to be learned from today’s market challenges are not new.
- Keep a long-term view.
- Invest, don’t speculate.
- Don’t attempt to time the market or guess where it is headed.
- Focus on what you can control.
Time after time, the markets have shown that panic selling, as we saw earlier this year, has been followed by significant buying opportunities. Savvy investors should ensure they are properly positioned to participate in the inevitable recovery. That sometimes means setting emotions and fears aside, understanding the lessons of the past, and keeping faith in the long-term strength and resiliency of the markets and the economy.
Bloomberg and Davis Advisors. Data is represented by the S&P 500 Index.
Tom Orecchio, Greg Plechner, and Mark Willoughby are principals for Modera Wealth Management, which offers fee-only wealth management services.