There’s no such thing as a crystal ball for stocks. Your guess is as good as mine as to the next big move in the market. But we can be confident of one thing: The market may be volatile. That’s because the headwinds that have thus far driven stock prices lower still exist.
The good news is that the stock market is likely to fully recover from this bear market and, as it has done since its inception, go on to new heights. But it could be a bumpy ride for anxious investors who will likely have to endure more market sell-offs this year. If you’ve come this far during this tumultuous market, you have more reasons to stick with it than to consider jumping to the sidelines.
Bear Markets Are Normal And Temporary
While it’s impossible to predict when a bear market will end, they eventually end. However, compared to bull markets, they have a much smaller impact on long-term investment performance. According to Hartford Funds quoting Ned Davis Research, the average bull market lasts about 2.7 years, while the average bear market lasts about 10 months. The average gain of a bull market is 112%, while the average decline of a bear market is 36%. So, over the long term, the absolute risk investors face is not the next 36% decline in a bear market. Instead, it’s missing out on the next 112% bull market gain.
The Biggest Gains In The Stock Market Occur Near Bottoms
While it may seem sensible and prudent to cut your equity exposure when stocks are declining, it could be your biggest investment mistake. First, when you sell into a decline, you lock in a permanent capital loss. Because the average investor typically waits for the “all clear” signal to get back in, they miss out on most of the recovery, making it extremely difficult to recoup their losses.
Secondly, suppose you are sitting on the sidelines to avoid the worst days of the stock market. In that case, you are likely to miss the biggest gains, further hampering your ability to recoup your losses and hurting your long-term investment performance. According to Fidelity Investments, investors who missed the five best trading days over the past 40 years saw their long-term gains reduced by 38%. Those who sat out the 10 best days missed out on 55% gains.
Sitting In Cash Is A Losing Proposition
Sitting in cash and avoiding the stock market chaos may feel better for the moment, but in today’s inflationary environment, you are guaranteed to lose money. Even as rates on savings accounts and CDs rebound from historic lows, they’re still significantly less than the rate of inflation. For example, at 8% inflation, a CD yielding 2% results is a net loss of 6% on your money.
You Don’t Know What You’re Getting With Alternative Investments
Some financial advisors are pushing alternative investments to counter the stock market’s volatility and poor performance. While assets such as private equity, hedge funds, real estate and collectibles may be holding up better than the stock market right now, there are some significant trade-offs with owning them. Firstly, they are illiquid because there is no active market for them. That makes it difficult to price them, so it’s hard to gauge their worth.
Secondly, they’re also illiquid because they charge penalties to get out early. That’s on top of the high fees associated with the investments. In addition, many alternative investments use a high amount of leverage.
Finally, they can be pretty complicated to understand. Many of these investments are subject to fewer disclosure rules or less oversight by the Securities and Exchange Commission. These types of alternative investments may be suitable for ultrahigh net worth investors with long time horizons and the excess discretionary capital to commit to them, but they may be unsuitable for a typical retirement portfolio.
It’s Not Part Of The Plan
The stock market is always going to fluctuate. There’s no getting around it. However, if you have a well-conceived investment plan and stay focused on your investment objectives, you don’t have to be as concerned with short-term fluctuations. A sound investment strategy already accounts for potential negative returns in the market.
For investors with a 10-to-20-year-plus time horizon, a 30% market decline will be shown as nothing more than a blip in your long-term investment performance. A diversified portfolio of high-quality stocks can help reduce volatility while compounding returns over the long term. More importantly, investors who have conviction in their investment plan are less likely to panic when the market turns against them.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.