The first half of 2022 has been turbulent; the news is full of stories about the impact from the Russian-Ukraine conflict, rising inflation, and a looming recession. We recognize that what is transpiring globally and in the stock market makes for an uncomfortable ride as an investor. We want to reiterate that while this may feel scary, our expectation is that those who bear today’s uncertainty should be compensated for doing so with positive returns at some point in the future; this has been the lesson of past market disruptions time and time again. While volatile periods like the one we’re experiencing now can be intense, investors who learn to embrace uncertainty may often triumph in the long run. Reacting to down markets is a good way to derail progress made toward reaching your financial goals. Here are some key things to keep in mind during periods of volatility that can help you stick to your well-built plan:
A Recession Is Not A Reason to Sell
Are we headed into a recession? A century of economic cycles teaches us we may well be in one before economists make that call. But one of the best predictors of the economy is the stock market itself. Markets tend to fall in advance of recessions and start climbing earlier than the economy does. As the chart below shows, returns have often been positive while in a recession.
Growth of $100 Invested in the S&P500
1926 – 2021
Whether accompanied by recessions or not, market downturns can be unsettling. But over the past century, US stocks have averaged positive returns over one-year, three-year, and five-year periods following a steep decline. A year after the S&P 500 crossed into bear market territory (a 20% fall from the market’s previous peak), it rebounded by about 20% on average. And after five years, the S&P 500 averaged returns over 70% on a cumulative basis.1
FAMA/French Total US Market Research Index Returns
July 1, 1926 – December 31, 2021
We believe that staying invested puts you in the best position to capture the recovery. The only good reason to sell out of a stock portfolio now – so long as it’s diversified and low-cost – is because you learned something about your risk tolerance, or your investment goals have changed.
Time the Market at Your Peril
When stocks have declined, it might be tempting to sell to stem further losses. You might think, “I’ll sit out until things get a bit better.” But by the time markets are less volatile, you’ll have often missed part of the recovery. Yes, it stings to watch your portfolio shrink, but imagine how you’ll feel when it’s stuck while the market rebounds. Big return days are hard to predict, and you really don’t want to miss them. If you invested $1,000 in the S&P 500 continuously from the beginning of 1990 through the end of 2020, you would have $20,451. If you missed the single best day, you’d only have $18,329—and only $12,917 if you missed the best five days.2
History shows the stock market tends to rebound quickly. The same can’t be said for individual stocks or even entire sectors. So, while investing means taking on some risk for expected reward, investors should mitigate risks where they can. Diversification is a top risk mitigation tool, along with investing in fixed income and having a financial plan.
A sound approach to investing is the ultimate defense during these rough markets.
- Reacting to down markets is a good way to derail progress made toward reaching your financial goals.
- Over the past century, stocks have averaged positive returns over one-year, three-year, and five-year periods following a steep decline.
- One of the best ways to avoid succumbing to emotion at the expense of your portfolio is to speak with your advisor and make a plan.
Please reach out to us if you would like to talk about your portfolio or have any concerns, we are here to help.
Danielson Group Wealth Management
Assante Capital Management Ltd.
1 S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment.
2 Past performance, including hypothetical performance, is no guarantee of future results. Growth of $1,000 is hypothetical and assumes reinvestment of income and no transaction costs or taxes. The analysis is for illustrative purposes only and is not indicative of any investment. S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment.