Investors are facing several concerns right now, and many have impacted the markets—geopolitical unrest, record-high inflation, supply chain issues, and the continuing complications with Covid-19 variants, ebbs, and flows.
When market volatility arises, it may go against your gut to stay invested. Why keep your money in something that’s losing?
But the truth is, the majority of investors can actually benefit from keeping their money in the markets during a downturn—at least when you analyze the history. According to Investopedia, since its inception in 1957 through 2021, the S&P 500 has returned an average of 10.5%!
Below we’ve identified a few reasons why we believe it’s essential to think long-term and how to manage your portfolio during market downturns responsibly.
The Importance of Long-Term Investing
Investing is about playing the long game. The more time your money spends invested, the more likely you will earn interest and grow your net worth.
Unfortunately, times of market volatility or downturn can make it challenging to stay focused on the long-term benefits. When you see your portfolio’s value take a nosedive, human nature takes over, and many investors’ immediate instinct is to pull out and stop the bleeding.
But even though downturns may hurt at the moment, the sting is only temporary because markets trend up over the long run.
Take the S&P 500 as an example. Since 2000, we’ve seen times of severe market volatility—the dot com bubble burst in 2001, the housing market crisis in 2008, and, most recently, the onset of Covid-19 in 2020.
From February 19, 2020, to March 23, 2020, the S&P 500 declined by about 34%. But, as hindsight has shown us, it bounced back almost as quickly as it dropped.
In fact, if you invested $100 in the S&P in 2000, it would be worth about $483 today. Markets drop in reaction to what’s happening globally, but the long-term data shows that the value continues to grow.
How to Manage Market Turbulence
Market turbulence can actually be a solid opportunity for investors. When the market goes down, prices drop, allowing savvy investors to buy shares “on-sale” and grow their portfolios.
Of course, for those looking to sell, the drop in prices isn’t ideal, and the first whisper of doubt (or downturn) may make investors nervous. At this moment, some investors decide to sell and walk away, even if that means taking a massive loss, not only in current gains and taxes but also in future growth.
Understanding Future Growth
Getting out of the market during a downturn may make you feel better, knowing the value of your portfolio won’t sink any lower. The problem is that you’ve now prevented your portfolio from taking advantage of potential future growth.
A market impact study by JPMorgan crystalizes this idea. Their team compared an initial $10,000 investment return over 20 years. Investors that stayed in the market the entire time saw a 6.06% return. But those who took money out of the market and missed its 10 best-performing days only saw a 2.44% return.
This research also highlighted that the market’s best days closely follow the worst ones, so pulling all of your money (or even some of it) out of the markets on its worst days could be missing out on its best just a day or so later.
How Long Market Downturns Tend To Last
Plus, bear markets are typically shorter than bull markets. On average, a bear market lasts a little over 9.5 months, whereas a bull market runs for over 2.5 years!
Remember, historically, market downturns end eventually. If you let your money ride it out, you’ll likely see prices start to rise again.
For those nearing retirement, we understand that you may not have time on your side to ride out a market downturn. If that’s the case, we recommend working with an advisor to address your immediate income needs and discuss your options.
Understanding Your Biases
There are few things more personal than your money. After working hard to build a nest egg over the last several decades, it can be tough to watch the numbers sink during a market downturn. Times of turbulence can be scary, and they leave investors wondering if they should pull out quickly or try to weather the storm.
The problem is, it’s nearly impossible to make unbiased decisions regarding your own money. Whether you realize it or not, your judgment can be skewed by what you’re reading online, hearing from friends or family, and watching on the news. Instead of focusing on long-term growth, these influences may have you shaken up over short-term downturns.
The good news is that working with an advisor can be an effective way to remove emotion from the decision-making process. An advisor acts as your sounding board to help you better understand your biases. Knowing what triggers you or why you feel a certain way about your money is an essential first step in overcoming them.
A financial advisor can help you drown out the noise while putting the focus back on your long-term plan. During times of market volatility, they will work with you to minimize risk in your portfolio and take advantage of opportunities during market dips.
At Legacy Wealth Advisors, we don’t make decisions based on gut feelings or trending news. We take an evidence-based approach to managing your investments, meaning our choices are based on data, historical precedent, and expertise. Our software also provides real-time projections, which can give a more accurate assessment of your portfolio’s long-term value and how it translates to income in retirement.
Investing with Legacy Wealth Advisors
When the markets start turning, investors may become fearful and rash. Before making any significant moves to your portfolio, we urge you to get in touch with our team.
We’d be happy to discuss your long-term goals and tolerance for risk, as these should be the primary influences on your portfolio.
