“The market has been really volatile this whole week. I want to sell everything”
I am sure at one point or another some may have expressed their emotion of regret when it comes to investing. Some of you may have said to a friend or thought to yourself, “if only I sold my investments, then I would not have lost money”. Alternatively, you may say, “if I waited a bit longer, I would have purchased that security for less than I paid for it and made a more profitable return”. It is common that we may have these emotions. Nonetheless, there is an adage, “hindsight is 20/20”1. This means that it is easy for one to be knowledgeable about an event after it has happened.
For many of us that have lived through downturns in the market such as in the years, 1929, 1987, 2001, or even 2008, the decline of the market had a ripple effect of our emotions, and how we think. Quite often when there are events in world or the economy the markets will typically react by the emotions of the investors – good or bad. Hence there is no ideal solution to predicting what may or may not happen. The objective of investing is to be in the market throughout the timeframe until you achieve your objective(s). During the course of your investing time horizon, you and your financial planning team may meet during the year to review your accounts and discuss the possibility of reallocating funds to ensure the risk versus the return you might be looking to ascertain could be achieved.
As one may feel inclined to liquidate their portfolio at times of mass hysteria in the markets the next to best thing to do is wait and be patient – this too shall pass. Warren Buffett once said, “be fearful when others are greedy and greedy when others are fearful”.
When the markets go up, people typically get excited but when they go down, everyone runs for the hills. During the 2008 financial crisis, it was common that most investors wanted to sell their investments within all of their accounts, whether they were planning for retirement or not. The reaction created a negative impact in the markets. While working at a wire house at the time, I would share in my discussions with clients that the best strategy given clients’ respective circumstances was to leave their securities as is, and not make any drastic changes.
Although history is not indicative of future performance it does tend to teach us some lessons. As studies have shown that for a 15-year period between 12/31/03-12/31/18 if people were not invested during the best days in the market their returns would be reflected as a result of their absence2,3. For example, if someone invested $10,000 during this period and missed the following number of the best days:
• 10 Days – Their portfolio was worth $15,481
• 20 Days – Their portfolio was worth $10,042
• 30 Days – Their portfolio was worth $6,873
• 40 Days – Their portfolio was worth $4,943
If they stayed fully invested during this timeframe, their portfolio would be worth $30,711.
The lesson from this study is, “you must be in it to win it”. As hard as it might be not to react out of emotion, but in times when markets might appear to be volatile, it may not always be a suitable strategy to liquidate your holdings. If one’s thought is when the markets “calm down” you will reinvest, but the reality is when is defined as, “calming down”? When trying to invest for the long term, either for retirement, buying a house, or paying for your child(ren) to attend college, staying invested can make a difference in the overall planning efforts.
All the while, it is critical to review ones underlying investments to determine if it makes sense to reallocate your investment portfolio. The rebalancing could be a result of getting closer to meeting your respective milestone or a change in risk tolerance or investment philosophy. In either case, it may not make sense to “sit on the sidelines” while everyone is still in the game.
- Study done by Putnam Investments: https://www.putnam.com/literature/pdf/II508-ac37f7ad02b2d8889f7e5361f0e8ac86.pdf
- This analysis was based on a $10,000 investment into the S&P 500 between 12/31/03-12/31/18. This is for informational purposes and is not a recommendation for any specific investment.
Registered representative of and securities offered through Hornor, Townsend & Kent, Inc. (HTK), Registered Investment Advisor, member FINRA/SIPC, 600 Dresher Road, Horsham, PA 19044, (215) 957-7300. HTK does not accept time-sensitive or action-oriented messages delivered via e-mail, including authorization to “buy” or “sell” a security or instructions to conduct any other financial transaction. 2446409AL_MAY21