Many of us look forward to summertime as an opportunity to relax and perhaps distance ourselves from some of the chaos of daily life. However, if you tend to keep a close eye on your investment portfolio, these past few months have been especially stressful. Financial markets have taken a significant tumble from post-pandemic highs, testing investors’ resilience and the strength of their financial plans. History suggests that such market corrections, where participants reassess the values of investments, are defining moments for investors. Those who possess the conviction to hold through the dip are rewarded, while those who panic in the short-term are punished with poor performance.
It is not unusual for investors to get cold feet when markets falter. An individual’s investment account often constitutes most of their hard-earned savings and future retirement income. Watching the value of a nest egg dissipate can raise questions about one’s lifestyle and financial security. Changing economic conditions this year have stoked fear in the markets, causing the run up in stocks following the initial COVID crash to reverse course. Monetary policy makers at the Federal Reserve have hiked interest rates dramatically to curb inflation, which has surged to a forty-year high. Combine these pressures with the looming threat of a recession and financial markets are bound to suffer. The first half of 2022 saw the worst S&P 500 index performance since 1970, declining nearly 21% and losing a staggering $8.5 trillion in market value. Rockstar growth stocks that were major drivers of market gains in recent years have fallen the hardest in this recent downturn, with Facebook parent Meta down over 50% since the start of the year. Diversified stock mutual funds, which constitute the backbone of many portfolios, have not been immune to the pain. Signaling their concerns, investors withdrew $17 billion from U.S. stock funds and exchange-traded funds in the second quarter alone.
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The current bear market is far from the first time markets have stumbled. Mutual fund company Hartford Funds has identified seven instances since 1960 where the stock market has fallen over 30%. Each of these selloffs, spurred by major economic and political events, have caused untold numbers of speculators to lose their savings. However, for the even-keeled investor, each of the subsequent recoveries has provided an incredible opportunity to capture gains.
While choosing the right assets to purchase is important, data has shown us time and time again that investing is truly an exercise in psychology. After all, it seems perfectly rational to shift into safer holdings when the market is experiencing high volatility. Most people have a strong desire to protect their principal investment, regardless of the implications this decision can have on the value of their account in the long term. Behavioral economists attribute this to the theory of loss aversion, as the pain of losing money is typically thought to be about twice as intense as the pleasure of gaining it. We saw this phenomenon in practice during the turmoil of the 2008 financial crisis, when some investors panicked and succumbed to their fears, liquidating their positions to cash. Unfortunately, this decision caused them to miss out on the longest bull market in American history, with returns totaling over 400%.
Rather than attempt to time the market’s fluctuations, investors are best served by remaining fully invested no matter the market conditions. As has been the case for every downswing thus far, the market is sure to recover and reach new heights. Financial professionals often remind investors that time in the market beats timing the market. In a Charles Schwab study of 76 rolling 20-year periods, the difference between investing on the worst possible day each year (when the market was at its highest) and the best possible day each year (when it was at its lowest) was nominal.
In summary, the secret to long-term success is to invest early and often, and to not cave to the pressure of negative news stories encouraging you to sell into the volatility. Equity investments are meant for the long term.
A financial advisor can be a valuable resource when volatile markets attempt to persuade you to alter your plan. Please call my office today to discuss your investment goals.