As we move through history, there has always been and always will be outside noise when it comes to the markets. There’s always something to fear or a logical reason to sell and go to cash. That’s why I continuously preach taking a long-term approach and removing emotion from investment decisions as much as possible. This can be very difficult but that’s why sticking to a long-term approach and developing a financial plan is the key to meeting your goals. This provides piece of mind and ensures you are on the right track, regardless of what happens in the short-term.
Part of what brings me so much joy when working with clients is helping them through hard times and being a sounding board when they’re making decisions. There’s been a lot of negativity in the media over the past year when discussing the markets and economy. It’s a prime example of the “noise” I’m referring to. I believe last year was one of the worst years in history for a 60/40 portfolio (60% stocks, 40% bonds) due to interest rates rising as quickly and significantly as they did. To the surprise of many, this year has been better than we expected as well even though most of the return has come from a handful of stocks. My point here is that no one can predict what happens in the short-term and it is impossible to time the market. That’s exactly why keeping a long-term approach is necessary.
Here are some numbers behind what I’m referring to and why I preach staying invested through tough times:
Let’s say you invested $10,000 into the S&P 500 in January of 1986. If you stayed fully invested, you would’ve ended up with $177,410 in December of 2022. Now let’s look at your returns if you missed the best performing market days in that period (1):
Miss ten best days: You’d end up with $83,030.
Miss 15 best days: You’d end up with $64,946.
Miss 20 best days: You’d end up with $52,731.
Miss 30 best days: You’d end up with $35,549.
Miss 40 best days: You’d end up with $24,842.
Miss 50 best days: You’d end up with $17,961.
Miss 60 best days: You’d end up with $13,303.
My next point is that no one knows when the “best" days are going to come and that they often come in the worst performing markets. Over the last 20 years, 7 of the 10 best price return days happened when the market was in bear market territory (2). As quoted by the visual capitalist, “Adding to this, many of the best days take place shortly after the worst days. In 2020, the second-best day fell right after the second-worst day that year. Similarly, in 2015, the best day of the year occurred two days after its worst day (2).
No one knows when the best days in the markets are going to happen and historically, they take place during some of the worst overall markets. This is why it’s key to stay invested. Otherwise, you’ll lose out on significant returns over the long term.
When discussing the long term, your odds of positive returns increase significantly when “zooming” out. Here are the range of annual returns of stocks and bonds from 1950 -2022 (3):
1-year time horizon:
- Stock returns have ranged from -39% to 47%
- Bond returns have ranged from -13% to 43%
5-year time horizon:
- Stock returns have ranged from -3% to 28%
- Bond returns have ranged from -2% to 23%
10-year horizon:
- Stock returns have ranged from -1% to 19%
- Bond returns have ranged from 1% to 16%
20-year time horizon:
- Stock returns have ranged from 6% to 17%
- Bond returns have ranged from 1% to 12%
As we see above, the odds of positive returns increase significantly as you increase your time frame. Historically, we’ve never seen negative returns in the market when looking at a 20-year time frame.
The average investor has significantly underperformed the market over the course of history. In my opinion, the two main reasons for this are making emotional decisions and making decisions based on short-term conditions. That’s why I believe everyone needs to have a plan, stay invested through market ups and downs, and take a long-term approach to investing. Along with developing a financial plan, this is the key to meeting your goals.
(1) Three charts on the benefits of staying invested (fidelity.ca)
(2) Timing the Market: Why It's So Hard, in One Chart (visualcapitalist.com)
(3) am.jpmorgan.com/us/en/asset-management/protected/institutional/insights/market-insights/guide-to-the-markets/guide-to-the-markets-slides-us/investing-principles/gtm-histreturns/
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