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1) MARKET DOWNTURNS ARE NORMAL
Since 1980, the S&P 500 has experienced intra-year corrections of over 10% in 22 separate years but has finished the year with a negative annual return in just 10 of those years (or 45 percent of the time). More than half of those years were associated with U.S. recessions (1981, 1990, 2000, 2001, 2002, and 2008). While past results are not predictive of future results, even those downturns were followed by an eventual recovery and a new market high.
2) “TIME IN THE MARKET” MATTERS MORE THAN “TIMING THE MARKET”
It’s tempting to exit stock positions during volatile times but doing so can often weaken long-term returns. Using a $10,000 initial investment and the S&P 500 benchmark as an example, simply staying invested between 1990 and 2023 would have returned $223,193 — a 9.8% annual return. However, if an investor missed the ten best days, that return drops to $102,252 — a 7.3% annual return. Importantly, 8 of the 10 best days occurred within 2 weeks of the 10 worst days. Exiting positions may result in losing out on meaningful price appreciation that has historically followed downturns.
3) DIVERSIFICATION MATTERS
No asset class has consistently offered the best returns year in and year out. By maintaining investments in several different asset classes investors can lower the impact of any one event on their portfolio. The portfolio’s return will be lower than the top performing asset class, but it will also be better than the worst performing asset class. Diversification can help lower portfolio volatility and reduce the stress associated with market downturns.
4) FOCUS ON THE LONG-TERM
U.S. stocks, historically, have tended to rise over time. Since 1927, the S&P 500 has posted positive returns in 75% of calendar years with an average total return of 19.7% during those years. The average decline in negative years was -12.5%. Between 1927 and 2022, a 20% plus percent return from the S&P 500 was six times more likely than a 20% plus decline. It is important to maintain a long-term perspective when investing, particularly when markets are declining.
5) MAKE A PLAN AND STICK TO IT
Having a plan that focuses on long-term individual goals helps to avoid emotional decisions that might prove short-sighted. While market declines can be stressful, they also offer a chance to acquire more shares at a lower cost. The opportunity to potentially, "buy low and sell high,” rarely comes when the market is trading at new highs. Instead, these types of opportunities most often occur during times of market turmoil. Sticking to a thoughtfully constructed plan can help an investor with this type of rational investment decision-making.