The latest 12-month return through the end of March for the U.S. stock market is a loss of around 9%. The last all-time high for the S&P 500 was on December 27, 2021. That’s over 460 days since we’ve seen new highs in the stock market. For investors, that can feel like a really long time!
During times of stock market and economic uncertainty, I will get questions like the one someone asked me last week:
“Should I get out of the stock market and get back in when it starts going up again?”
What I find interesting about this particular question is it’s always asked after significant declines in the stock market.
This is a concern I got quite a few times towards the end of last year after the market was already down 20%+ from the beginning of the year.
If you really wanted to save yourself from the pain of watching your portfolio value drop, you would need to cash out before these declines. But no one was clamoring to get out of the market before the pandemic in 2020 because the S&P 500 was up more than 50% over the previous five years. Nor did I hear about anyone wanting to get out before this most recent correction which began in December 2021, because the market was up over 25% in 2021.
Nobody wants to sell their stocks when they’re making money so the thought of selling usually doesn’t occur until after the discomfort of some losses. While selling out of your stocks after a big market drop may provide some sense of relief, it can be devastating to your net worth.
The Wall Street Journal recently interviewed a handful of retirees about their financial lives. The first couple shared how their retirement plans changed drastically after the 2008 crash:
“Mr. Jones’s retirement account took a hit in 2008 and never recovered. Spooked by the S&P 500’s 38.49% decline in 2008, he sold his stocks and invested in a stable value fund that earned about 1% a year.”
The article says Mr. Jones’ account is now worth $129,000 after the 1% per year returns, which means it would have been worth around $110,000 when he cashed out of his stocks in 2008.
Had he not been spooked by the market crash and simply kept his money in an S&P 500 fund, his account value would be somewhere around $690,000 right now. Since the crash in 2008, the S&P 500 is up well over 500%.
I hear anecdotes all the time of family members and friends who supposedly “lost everything” in the 2008 financial crisis and that’s why they’re now suspicious of the stock market. The only reason someone would have lost everything is if they had sold their stock after the downturn and weren’t invested for the ensuing 10-year bull market where they would have made up all of their losses and then some.
If you take your money out of the stock market after a large decline you never even give your portfolio a chance to recover.
“I’ll just get back in when the dust settles.”
Waiting for the perfect time to invest rarely works out. Either you get too comfortable sitting in cash because it feels like the downturns will never end or when stocks rip upward as they tend to do coming off of a market crash, you’ll talk yourself out of investing because you assume those gains aren’t going to last. By the time the dust settles, it’s usually too late.
When things seem uncertain or scary, our human instinct is to do something. However, most of the time the most optimal thing you can do for your portfolio is nothing.
It’s hard enough to sit through the occasional massive drawdown in the stock market. But if you take those beatings and miss out on the subsequent gains, you end up losing twice.
And that’s one big investing mistake that’s difficult to recover from.
Thanks for reading!