For most investors, the losses of 2022 are still fresh in the mind. The S&P 500, the most commonly followed index for U.S. stocks, dropped more than 18% that year. To make matters worse, the Bloomberg Aggregate Bond Index finished that same year down 13%. That marked the largest drop in the index in the last 50 years, and was also the only time during that period when both stocks and bonds dropped in the same year.
And yet, if you got sick of losing money in the stock market that year and sold all of your investments at the end of 2022, you lost a lot of potential market gains. Since the end of 2022 the S&P 500 has surged more than 50%, while the Bond Index is up nearly 10%.
As always, the lesson is patience. A good investor is patient, holding quality investments for the long haul and not letting emotions like fear and greed dictate the strategy. If your portfolio is too volatile for you to exercise patience, you likely need to exorcise that portfolio (and invest in a portfolio that better matches your risk tolerance).
To further illustrate my point, did you know that the S&P 500 index has gone down in every single one of the past 25 years, according to JP Morgan? The index didn’t stay down in all of those cases, but at some point in time during each year the S&P 500 was lower than where it started the year, before rebounding later in the year. In the most pronounced case of this, 2020, the index dropped 34% in March but rallied to a year-end gain of 16%. People who sold near the bottom got crushed, while investors who held for the long haul generally made a nice return!
If we look at this phenomenon even more closely, a full 17 of the last 25 years saw a drop of at least 10% in the S&P 500 at some point during the year. Of those 17 years with large mid-year drops, 8 ended with the market higher for the year.
It’s tempting to pull out of the market when things are looking bad, and to push money in when the market is hot. Unfortunately, evidence shows that to be one of the worst possible investment strategies, since you sit out a lot of the best days and sit in for many of the worst. Dimensional Fund Advisors notes that that the annualized compound return of the S&P 500 from 1990-2023 was 10.21%, but if you missed the 25 best days on the market your returns dropped to 5.30%. Put simply, missing the best days can cost an investor dearly! Since we can’t predict which days those will be, it is critical to be invested for the long haul in order to capture those investment gains.
Think about this another way. I’m a Tahoe skier. How many years have we gotten to the end of February, the snowpack is thin, there’s no powder to be found, and then a Miracle March kicks in? Too many times to remember! That’s why we never put our skis and snowboards away for the year in February. If we did, too often we would miss out on the best powder days.
Be a smart investor. Invest in a strong and appropriate portfolio. Then, sit back and wait for that glorious pow…I mean…for those best days in the market to come. They will, sometimes when you least expect it.
However you choose to build your portfolio, invest smartly and invest well!
Larry Sidney is a Zephyr Cove-based Investment Advisor Representative. Information is found at https://palisadeinvestments.com/ or by calling 775-299-4600 x702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Past Performance does not guarantee future results. Consult your financial advisor before purchasing any security.
