Have you ever noticed how the stock market can experience dramatic surges on certain days? One recent example took place following Donald Trump’s election victory. His win triggered a massive market rally: the Dow surged by more than 1,500 points, the S&P 500 climbed 2.5%, and the Nasdaq soared 3%, setting new record highs.

These sudden market movements are a prime example of an important investment reality: a significant portion of a portfolio’s long-term gains come from a few key days each year. Missing out on these crucial days can severely impact your returns, underscoring the importance of staying invested, even during periods of volatility.

In this article, we’ll explain why staying invested is crucial for your financial success. We’ll also explore how fear can derail well-intended investment plans and why patience – paired with the right investment approach – is the best strategy for achieving your financial goals.

The Challenges of Staying Invested

The financial markets are inherently unpredictable. While historical data shows that stocks tend to rise in value over time – the S&P 500 has enjoyed a 10.5% annual gain since 1957 – there will always be short-term market downturns, corrections, and bear markets that shake even the most seasoned investors.

With your hard-earned money on the line, it’s easy to get fearful when the markets take a turn or when headlines forecast economic downturns. You may impulsively sell off your stocks when the market reaches a low point with plans to buy back in at a better time.

But here’s the hard truth: it’s nearly impossible to time the market. Predicting the ideal times to buy and sell is incredibly difficult, even for the most experienced professionals.

The Opportunity Cost of Trying to Time the Market

Not only is timing the market an untenable strategy, but it can lead you to miss out on the most lucrative days of the market – those days when the market rebounds sharply – dragging down your returns by gut-wrenching percentages.

Just take a look at this data:

• Even a few missed days can drastically affect your portfolios’ long-term performance. If you missed the market’s 10 best days over the past 30 years, your total returns would be slashed in half. If you miss the market’s 30 best days in that same time frame, your total returns would be reduced by a whopping 83%.
• 78% of the best market days occur during bear markets or the first two months of a bull market. Thus, avoiding downturns could cause you to miss out on these lucrative rebounds.
• S&P 500 annualized return from 1995 to 2023 was 8.4% for those who stayed fully invested. However, those who missed the best five days only saw a return of 6.6% (a 21% reduction), while those who missed the top ten days had returns of just 5.5%. Missing the best 30 days brought returns down to just 2% — a 76% reduction.
• Even through major market events, staying invested has paid off. Since June 1996, a $100,000 investment in a balanced portfolio (60/40 stocks/bonds) returned over 9.7% annually despite enduring several global crises and five bear markets.
• If you try to time the market, there’s a 70% chance you’ll miss one of the best days. Thus, this strategy can significantly hurt your returns.

As you can see, skittish investors who exit the market during sharp downturns are much more likely to miss out on the upturns, losing out on substantial portfolio growth. In contrast, staying invested is the safest way to ensure you capture the market’s five strongest performance days.

Navigating Bear Markets: Why Patience Pays Off

Based on these statistics, it’s clear that staying in the stock market during bear markets is better than exiting in a panic. A bear market is defined as a decline of 20% or more, which can be quite alarming for investors.

Historically, bear markets have often been followed by some of the best bull markets, where stocks experience rapid growth. The key to capturing these gains is staying patient during market downturns rather than giving into fear.

To emphasize this point, let’s examine the outcomes of four types of investors from 2004 to 2023. Each contributed $3,000 to their portfolio each year, for a total of $60,000 over 20 years.

• Investor 1 had an uncanny ability to time the market. Every year, they invested their annual funds during the lowest point of the year. By the end of two decades, their $60,000 had transformed into an impressive $135,639.
• Investor 2 didn’t attempt to time the market, knowing it was a near-impossible pursuit. Instead, they used dollar-cost averaging to invest their annual contributions in 12 monthly installments. By the end of two decades, their $60,000 was now worth $125,482, just $10,157 shy of their clairvoyant counterpart.
• Investor 3 had unfortunate luck with market timing. They contributed their annual funds at the market’s highest point every year. Despite their poor timing, they ended up with $117,966 at the end of two decades, only $7,516 below investor 2.
• Investor 4 chose to avoid the stock market altogether. Instead, they left their money in an interest-generating savings account. After 20 years, they only attained a return of $9,663, bringing their total up to $69,663 – a far cry from all three stock market investors.

As these examples clearly display, timing the market perfectly only provides a marginal benefit in the long term. In contrast, staying in the market can yield substantial wealth as you capture decades of compounding growth.

The Fear Factor: Why Investors Panic

Now that you know some facts about staying invested, let’s examine the feelings that motivate so many investors to make trades that are out of alignment with their best interests. Most investors’ anxiety stems back to a psychological fear of loss.

As humans, we’re wired to react more strongly to losses than to gains due to a cognitive bias known as loss aversion. For example, losing $50 tends to upset people twice as much as gaining an unexpected $50 makes them happy.

Now, let’s apply this phenomenon to investing. When the market drops, our brains overreact, urging us to pull out of investments to avoid further losses. This move can temporarily alleviate our fear. However, we often only realize we missed the ideal re-entry point after it’s too late.

This cycle of buying and selling in response to fear and uncertainty is often referred to as “market chasing” or “emotional investing,” and it can be incredibly detrimental to long-term wealth accumulation.

How to Conquer Loss Aversion and Grow Your Wealth

The key to overcoming loss aversion is having a clearly defined financial plan – one that can weather the storms and keep you focused on your long-term goals rather than reacting impulsively to short-term market swings. A financial advisor can help you craft a plan that encompasses the following:

• Your investment goals – During your first meeting with your financial advisor, you can clarify your short- and long-term financial goals. Maybe you want to save for a down payment on a home or a comfortable retirement. With your goals at the forefront, you can stay focused during your investment journey and avoid making rash decisions based on temporary market volatility.
• Risk tolerance – Your risk tolerance is your capacity and willingness to withstand investment fluctuations. A skilled financial advisor can help tailor your investment strategies to match your comfort levels, making you less likely to panic sell during market downturns.
• Asset allocation – While stocks can offer impressive returns over time, they’re not the only asset available. Bonds, real estate, and alternative investments are also worthwhile options. Your financial advisor can help you determine how to distribute your funds across these asset classes to best align with your goals and risk tolerance.
• Time horizon – At some point, you may want to withdraw your funds to finance other endeavors, such as a home purchase or your retirement. By sharing your specific timelines with your financial advisor, they can tailor your portfolio to meet those goals. Having a clear timeline also helps you stay calm during market downturns since you know you don’t need to access those funds immediately.
• Regular reviews – While you don’t want to sell off your investments from a place of panic, you don’t need to stay locked into the same investments forever. With your financial advisor, you can review your portfolio periodically and make adjustments as necessary to align it with your evolving goals and financial circumstances.

Portfolio Rebalancing vs. Timing the Market

Rebalancing your portfolio can play a vital role in your investment strategy. Portfolio rebalancing is the process of adjusting your asset allocation to ensure it still meets your risk tolerance and long-term goals.

Here are four ways that rebalancing differs from trying to time the market:

• It focuses on your long-term goals – Rebalancing aligns your portfolio with your long-term goals by ensuring that your asset allocation is still appropriate. On the other hand, market timing attempts to predict short-term market movements, often unsuccessfully.
• It requires regular adjustments. Rebalancing is a periodic process, typically done quarterly or annually, that ensures your portfolio stays in line with your target allocation. Meanwhile, market timing involves making sudden adjustments based on perceived market risk.
• It isn’t emotionally motivated – Rebalancing is a strategic approach that eliminates emotional bias from your decision-making. In contrast, market timing is impulsive and fixated on short-term fluctuations.
• It maintains mindful diversification – Rebalancing enables you to adjust your asset allocation to maintain a diversified portfolio, ensuring that no single asset class becomes overexposed. Conversely, market timing can easily lead to overconcentration in certain sectors or assets, increasing your risk exposure.

In summary, rebalancing allows you to take advantage of market corrections in an organized manner while tuning out the noise of emotional impulses. Since rebalancing requires discipline and expertise, it’s best managed by a professional financial advisor.

Tune Out the Noise with Nicole Sennett

In today’s world, it’s more difficult than ever to ignore the noise. The media is constantly buzzing with predictions about the next bear market, the latest economic crisis, and the “next big thing” in the investment world. These distractions can fuel your anxiety and spur impulsive decisions.

For the reasons explained above, it’s crucial to remember that market swings are a part of the bigger picture. Tuning out the noise and sticking to your plan is the most effective way to realize substantial gains over time.

When you have a financial plan that reflects your goals, risk tolerance, and time horizon, you’ll feel more empowered to resist the urge to react to every market fluctuation. Nicole Sennett, an experienced Chartered Retirement Planning Counselor (CRPC), can confidently help you craft a strategic financial plan.

Nicole has seen first-hand that the key to successful investing isn’t trying to predict the market’s next move or timing your entry and exit perfectly—it’s about staying invested amid the ebbs and flows. With her expert guidance and support, you can stop letting fear drive your investment decisions.

Ready to grow your wealth? Schedule a consultation with Nicole Sennett today.

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