So what should investors do about it?
January 2016 Market Performance
There is no getting around it, stocks are off to a horrible start in 2016. From the beginning of January through January 21, the S&P 500 index has fallen 8.37%. During that same period, the Dow Jones Industrial Average has fallen 8.73% and the NASDAQ Composite has tumbled 10.5%. So, should you sell your stock positions before you lose more money?
- It’s impossible to predict the market.
Just because the market has fallen recently does not mean that the fall will continue. For example, a bad January in the stock market accurately predicts a bad year for the stock market only about 55% of the time. So, we may as well toss a coin. The market might have a bad year, or it might have a good year. Remember, there are hundreds more trading days left in 2016. No one really knows whether stocks will continue to tumble or if they will rebound next month. However, every single time that the stock market has fallen, it has risen again. Think about that for a second.
- The fundamentals of the market are always changing.
Institutional investors and financial advisors arranged their portfolios a certain way. And they are constantly tweaking based on changing market fundamentals – whether in response to interest rates, the Chinese economy or specifics related to certain companies. But we also know – as you do – that stocks involve risks (and corresponding rewards), as do all investments. We also know that stocks have historically risen over the long-term. We bought stocks because we had confidence that our investments would increase in value. Falling markets this month have not signaled any change in this fundamental long-term belief in the stock market. Therefore, your confidence in the wisdom of being in the stock market should not change either. If the markets survived the 1929 crash, the Great Depression, World War II, and 9/11, then they will survive January 2016.
3. Long-term investors have time to recover.
Think about this for a minute: the stock market cannot fall unless it has grown. And it has grown: from 1962 through 2015, the S&P 500 has risen an average of 7.6% annually. Because the stock market has historically gone up, losses can be recovered. However, investors recover their losses only if they leave their money in the stock market. Cash does not increase in value at the pace that stocks do.
- Timing the market simply does not work.
If it’s impossible to predict the market, then it’s even harder determining the exact moments to buy and sell. Investors who sell stocks and accumulate cash now, will then have to decide the right time to buy stocks again. You think anyone knows when that time might be? Sometimes the stock market rebounds soon after a fall, and at other times it takes weeks or months. However, whenever the rebound arrives, it tends to come quickly. Investors who wait until they see the stock market rebounding have already missed those big rebound gains.
A substantial amount of research has shown that investors who are in the stock market most of the time simply do not earn as much as those who are always in the stock market. The S&P 500 did not average an annual increase of 7.6% by rising steadily every day. There were varying days of big gains, small gains, big losses, and small losses.
In one study of the stock market over 40 years, researchers found that less than 1% of the trading days accounted for 96% of the market gain over the years. Think we know which days are in that 1%? I know that I sure don’t.
So, an investor who misses just a few days of the market’s largest gains will earn substantially less in the market than someone who never leaves. Because no investor is omniscient, no investor can avoid missing some or many of these big gain days.
The recent declines in the stock market should not lead investors to conclude that the market will continue falling for a sustained period of time. Because the stock market still operates in the same way as it has for decades, there is no reason to assume that the January 2016 fall in stock prices is different than any other decline in the past. It is simply too hard to predict what will happen in the short-term, so investors must look to the long-term.
In very simple words, because stock values increase over the long-term, investors will inevitably recover their losses. However, they must have their money continuously invested in the stock market to do so. It is very unlikely that an individual investor can somehow out-perform this long-term growth trend by moving in and out of the stock market according to his or her own timing. The buy-and-hold strategy has consistently worked the best.
Remember: Markets go down, and then they go up again. This is simply what they do.
Many factors affect the financial markets. Be sure to consult your team of qualified tax, legal, and financial professionals for specific guidance.
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