3 Reasons to Stay Invested
When markets are volatile, many of you get concerned and feel the need to bail, just to protect your money. But cashing out can backfire.
Lets look at some key takeaways to help you
Volatility is common, especially in the later part of an economic expansion. Historically, many investors who moved out of stocks during down markets didn't fare as well as those who stayed the course.
With inflation running high, uncertainty around the war in Ukraine, and recession worries rising, many investors are wondering whether it makes sense to take some or all of their money out of the market and wait until the economic storms pass. That might seem like a smart move if the markets continue to drop, even a short-term move to the sidelines can hurt your long-term returns and decrease the odds of achieving your financial goals, according to Naveen Malwal, an institutional portfolio manager with Strategic Advisers, LLC.
"Historically, we haven't seen a flight to safety pay off," Malwal says. "Despite some challenges investors may see, keeping your assets in cash may be a poor proposition right now."
Malwal cites 3 reasons why:
1. Market volatility is normal
Recently both stocks and bond prices have fallen on expectations of rising interest rates and lower growth going forward. But that reflects a deliberate decision on the part of the Federal Reserve to dampen economic growth in order to tamp down rising inflation. There's also no clear indication that a recession is imminent, according to Malwal. About 80% of companies in the S&P 500® wound up exceeding earnings expectations in the first quarter, and many also modestly improved their outlook for 2022. "We believe the US economy is still expanding, but in a mature part of the cycle, where the expansion is occurring at a slower rate," he says. And while market corrections can feel scary, they don't necessarily indicate future losses. In fact, double-digit drops are surprisingly common in the stock market - yet the S&P 500 has historically finished most years with a positive return.¹
Despite market pullbacks, stocks have risen over the long term
Source: Fidelity Investments. Past performance is no guarantee of future returns. See footnote 2 for details.
2. The best returns often happen when everything feels the worst
Counterintuitive as it may seem, some of the best days in the stock market have historically occurred during bear markets. "What we've seen historically is that investors who give themselves a time out of the market very rarely come back in at the right time," says Malwal. "Negative headlines can persist for some time. Investors typically wait for good news and by the time that happens, they've often missed some of the strongest days of market performance." And missing out on those big days can make a significant difference in your long-term return. A hypothetical investor who missed just the best 5 days in the market over the past 4 decades could have reduced their long-term gains by 38%; someone who missed the best 10 days could have undermined their gains by 55%.
Moreover, many of today's challenges have already been absorbed by the market, according to Malwal, such as the expectation that the Federal Reserve will continue increasing interest rates in order to combat inflation. "When it comes to bonds, our belief is that the worst is now behind us," he adds.
3. Holding cash may also be risky
With recent interest rate increases, yields on relatively safe accounts like money markets and high-yield savings accounts have risen, making them more attractive to savers. But returns on those accounts are still far below the current rate of inflation, meaning any money in those accounts will lose purchasing power over time. For example, if an investor puts $100 into a money market account today that returns 2% annually, it would be worth $102 a year later. But at an 8% inflation rate, goods that cost $100 today will cost $108.
Bottom line, stay the course particularly in a long term secular bull market. I believe over the next 10 years we will see an average return of 10%. But timing can reduce that potential return. Stop looking at your returns and trust the process. It works and will reward you if you stick with it.
"This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. The information does not represent, warrant or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. Past performance is not a guarantee of future results. Investors should always consult their financial advisor before acting on any information contained in this newsletter. The information provided is for illustrative purposes only. The opinions expressed are those of the author(s) and not necessarily those of Geneos Wealth Management, Inc."