As you may have heard, the US stock market, as measured by the S&P 500 index, has entered a bear market – down 20% or more from the high. I’ve gotten a few questions over the last several weeks along the lines of “Why don’t we just sell everything and go to cash?”
While it would be easy – especially for me – to answer with a joke about my foggy crystal ball, an honest question driven by emotions deserves a thoughtful answer.
Assuming your portfolio is comprised of quality investments, there are four main reasons to stay invested.
1) You already rode the market down: The most recent high in the S&P 500 came on January 3rd, the first trading day in 2022 after the index returned 27% in 2021. At that time, there were not many investors clamoring to liquidate their accounts. Typically, when the calls come in to liquidate accounts, most of the market loss has already happened.
In fact, when the market reaches bear market territory, it can be a tremendous time to buy!
2) Long term, trying to time the market is a proven method of wealth destruction: Unfortunately for those that choose to liquidate, they often miss the best days in the market and the initial surge back up, as shown in these outstanding charts from JP Morgan.
The average retail investor (orange bar) underperforms a 60% stock/40% bond portfolio (bright blue bar) by 3.8% per year. While that may not seem like much, over 20 years it’s the difference between doubling and quadrupling your money!
3) Inflation is nearly as damaging, without the possibility of recovery: One of the most cited reasons for concern I’ve heard is inflation. It’s true, inflation is about as high as it’s been in 40 years and there are some continuing pressures consumers and businesses alike are going to have to navigate. However, liquidating investments is likely to exacerbate the problem. Inflation will continue to eat away at the value of your cash, but unlike an investment that’s down in value, inflation is unlikely to reverse and make your cash more valuable down the road.
There have been studies, including by renowned Wharton professor Jeremy Siegel, that stocks are the best place to be invested in an inflationary environment. Logically, it makes sense. Companies are able to increase prices, leading to higher revenues, likely higher earnings, and therefore generally higher stock prices. And yes, I realize that logic and the markets don’t always mix, but in this case history says they do.
4) Choosing when sentiment will turn is practically impossible: There are always a mix of headlines, both positive and negative, for the market to weigh. Often the prevailing sentiment is to ignore one and focus on the other. Currently, negativity is winning. That will change but trying to predict when and why is nearly impossible.
In 2020 at the bottom, it was government intervention that turned the tide. Usually however, there’s not one single event investors can point to, and certainly not in advance. When sentiment turns positive, the market generally takes off.
Charts and data from JP Morgan can be found here.
Photo by Tim Hüfner on Unsplash