White flag in the wind
After weeks of sharp market decline, you may think you’ve had enough, want your hard-earned money in these uncertain times with you, in quarantine. And who could blame you?
Headlines Warn We’re Heading for a Global Financial Crisis uglier than 2008, and the stock market has recently had some of the worst days in its history, as a new virus spreads across the world and cripples economies. The past two months have been brutal for investors, especially those approaching retirement or another milestone such as sending a child to college or offering a down payment on a home.
Let’s say you had a $1 million portfolio, split between US stocks (70%) and bonds (30%), on January 1 of this year, when news of the coronavirus was just starting to come out of China. . By Monday, March 23, your savings would be down to approximately $780,000.
Worse still, we are told that there are no end in sight for this global health crisis.
Despite unprecedented times, however, some things never change: If investors can’t tolerate the losses, they’ll also miss the gains. “Pain is a sign that you are investing well,” said Allan Roth, founder of financial advisory firm Wealth Logic in Colorado Springs, Colorado.
Let’s go back to that $1 million portfolio reduced to $780,000.
If you had surrendered – in terms of investment, cut your losses and move into cash – on Monday, when it bottomed out, you would have missed out on the massive gains the market saw the next day, Tuesday March 24th. That day, the Dow Jones Industrial Average had its biggest one-day spike since 1933.
And that wallet, as a result, was back up to over $830,000. (These calculations were provided to CNBC by Morningstar.)
“Recoveries can happen in spurts,” said Rob Williams, vice president of financial planning at Charles Schwab, adding that investors have recently turned to cash and other defensive assets like bonds. “For longer-term investors, we suggest staying the course if they can.”
Williams provided some data to prove his point: Over the past 20 years or so, the S&P500 produces an average annual return of approximately 6%. But if you missed the best 20 market days during this period, for example by capitulating in declines and then reinvesting later, your average annual return would shrink to 0.1%.
If it’s any consolation to you in these trying times, most trials are over. Even aggressive, stock-heavy portfolios took only about two years to fully recover from the last financial crisis, Charles Schwab found.
It may seem impossible to imagine a reality different from the one in which we are engulfed. Yet we have been hit by disasters and havoc before, and the market has always rebounded. Why give it up now?