Is it time to get out of the market?
Is it Time to Get Out of the Market?
After years of strong market returns, 2022 has started off with a market downturn and talks of it wearing on for several more months. As a financial advisor, and someone who is well-researched in the pitfalls of trying to actively outsmart and time the market, I’m disciplined about maintaining a systematic approach to investing and try to convey to my clients my own sense of calm in times such as these.
What may appear to be nonchalance in the face of volatility is actually the best way for me to model how to act responsibly when it comes to their financial health. I know that any action, besides the intentional and normally scheduled rebalancing of investments which are well aligned with client goals, is extremely likely to hurt rather than help their long-term investment returns.
Regardless of how calm I feel though, after a few months of sustained negative returns, it’s not surprising or even unusual to start getting a few calls from clients asking if it’s time to get out of the market.
I think it’s vitally important that investors understand why the answer to that question is no. They shouldn’t have to simply take my word for it. So, whether you’re going your investment path alone or looking for reassurance that your financial advisor is giving you the best advice possible, let’s look at why the best action at a time like this is typically no action at all.
It is Far More Likely To Harm than Help Your Investment Returns
From a returns perspective, there are two key factors that drive the decision to stay the course.
- Most investment growth and loss happens on only a small percentage of days that the market is open. In the 20-year period between January 4, 1999 and December 31, 2018, 6 of the 10 best days in the market occurred within 2 weeks of the 10 worst days of the market. For an investor who invested $10,000 on January 4, 1999 and missed the 10 best days of the market in that 20 year period, their investment, after 20 years would have been worth $14,895, on the other hand, an investor who had stayed fully invested through all the ups and down’s would have ended up with $29,845. What feels like cutting your losses* in this case is very likely to reduce long-term gains.
- On average, bull markets last 8-9 times longer than bear markets, and have historically recovered more than 10 times what was lost in the preceding bear market. The biggest mistake investors make in market timing is not that they don’t get out before the market hits bottom, it’s that they are nervous and wait until they feel more confident in the market to get back in—a feeling that only comes once the market has recovered much of what it had lost. A great recent example of this is in the years between 2009 and 2020, the market saw stock growth of more than 400%, but all financial advisors will tell you, we had new clients approaching us as late as 2017 and 2018 saying they were finally confident enough to get back into the market after 2008. Although that’s an extreme example, even in far less extreme cases the result of this type of “I’ll get back in when the market feels more stable” approach is almost always lower long-term investment returns.
Even the idea of “cutting your losses” as it relates to market downturns is flawed. That turn of phrase is typically used to talk about situations where rebound and recovery is unlikely. But if history is any indicator, all bear markets have recovered and then some. What’s required to benefit most in times like this is patience, not panic.
Your Goals Haven’t Changed
Beyond maximizing returns, there are a couple of other pertinent points to consider. The first being that any good financial advisor has already factored market downturns into your plan. No good financial plan is complete without careful consideration of bad market years, and potentially bad timing of those years. How you are invested should reflect that plan. If your financial plan doesn’t incorporate this type of analysis, then it may be time for a new plan or a new planner. For my clients, I try to reframe the question, “is it time to get out of the market?” to “Does the current market condition change or impact your plan?” That’s the question that matters. And in a well-designed financial plan, if a market downturn does change or impact the plan, you should have been made fully aware of that potential before it happened. You shouldn’t be finding out about it now.
The Market Is Behaving in a Way that Makes Sense
The other point worth mentioning is that the current market is an appropriate reflection of the economic conditions we’re experiencing. The market in 2022 reflects the war in Ukraine and all of its economic fallout, a high inflationary environment and the Fed’s appropriate choice to raise interest rates in response, and continuing supply chain issues that are the result of a global pandemic and changes and shortages in the labor market. The market makes sense considering what’s going on in the economy. I imagine we’d all be skeptical if, despite this, the market just kept going up. In the long run, this type of slow down and adjustment adds stability to long-run returns by appropriately reflecting and adjusting to current conditions.