The Difference Between a 100% and 15,000% Return is 10 Days.
Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.
During times of high volatility, it can be tempting to get out of the market, but doing so puts you at an extreme disadvantage — even though you may feel no small comfort to be in cash. Panic selling not only locks in your losses but also puts you at risk for missing the market’s best days. The recent volatility following the discovery of the omicron variant shines a spotlight on such a scenario (see diagram below).
It’s not only the short term volatility that you need to look past — larger events like financial crises and recessions will also cause a temporary drop in the value of your investments. However, as long as you are properly diversified and do not sell in a panic, you would be able to reap the benefits of long-term investing and compounding returns.
Looking at data going back to 1930, research by BofAML found that if an investor missed the S&P 500′s best ten days in each decade, total returns would come up to only 91% — this is significantly below the 14,962% return for investors who held steady through the downturns (see diagram below).
The impact of missing just a few of the market’s best days can be profound, as shown below by this animated look at a hypothetical investment in the stocks that make up the S&P 500 Index (by Dimensional Fund Advisors).
So in the future if you feel a little bit concerned about what was happening in the markets, don’t rush out to sell just yet. Have a chat with us, for a second opinion on your investments — to check whether the projected losses, costs and expected returns are in-line with your targets.
