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A Conversation on "Staying the Course" Thumbnail

A Conversation on "Staying the Course"

Doug Garrison, CFP, MBA - Senior Wealth Advisor


*This is a conversation with a hypothetical client named Gloria.


Investec Advisor: Hi Gloria. I see you're now connected. It's good to touch base. A Zoom call isn't the same as meeting with you in person, and I can't get you that Diet Coke you usually have—let's just say I owe you one.

Gloria: That's okay. I'll take a rain check. Thanks for the video call. What's up?

IA: I just wanted to check in, see how you're doing and what you're up to. How are you faring with all this "sheltering in place?"

Gloria: Thank goodness I live in a two-story home. Too much togetherness can be, well, challenging. I love my dog, but he's getting really attached to seeing me working from home. I have to go to my study and close the door to keep him at bay. I'm also getting antsy. I feel like I don't have control over anything. They tell me to stay home, wash my hands, and wear a mask when I go to the grocery store. I've lost my independence!

IA: Yeah, it's been tough.

Gloria: So, I've also been thinking. I'm not very optimistic about where all this will end up, at least over the next year or so. We're down this year so far by what? After a couple of really bad days and a few good ones, what am I down? About 10-15 percent? And it's going to get worse, I figure. I think I should get out of the market entirely. Let's put it all into cash, and when things finally turn around, I'll get back into the market.

IA: So the recent downturn in the market and what's going on in the economy have you convinced it's going to get worse?

Gloria: Yes. It's not only the momentum of a market that's in decline, but it's all the bad news I see every day. It's got to get worse before it gets better. I have got to get out before it gets worse!

IA: Gloria, do you agree that longer-term, being invested in the great companies in the U.S. and around the world is the right approach for preserving and growing your wealth, maintaining your purchasing power in the face of inflation?

Gloria: Yeah. But I just don't want to lose any more money now. We're down already, remember. I can't stand to see more losses in my portfolio.

S&P 500, Price Returns - 15 Best Days Since 1950IA: I recently came across a statistic you might find interesting. Through March 31, 2020, the fifteen best days for the S&P 500 since 1950 all occurred during bear markets, not bull markets as you might expect. Four of the fifteen were in a two-week period this past March. Let me show you the chart.

Gloria: So you're telling me history says I should stay invested even if I think we're in a bear market?

IA: You've got it, Gloria. I understand why you feel the pain, seeing your portfolio value go down, but remember—until you go to cash, until you sell your positions, you've not actually lost money. What has gone down can come back up. And as the chart shows, some of the best days to be invested are in the middle of a bear market.

Gloria: What about returns following gut-wrenching down days, like what we had this past March? What does history tell us about them?

IA: I'm glad you asked. Look at this next chart I have for you. It shows the fifteen worst days for the S&P 500 since 1950 (through the end of March, 2020) and the returns one year later. Three of the fifteen were in this past March. Average return one year later of 24% and only one instance of a negative return. Kind of interesting, don't you agree?

S&P 500, Price Returns - 15 Worst Days Since 1950

Gloria: Yeah, it's a bit surprising. I'm not sure I would have predicted that. But I'm still intrigued with the notion of pulling out of the market so I don't subject my portfolio to those really bad market moves I envision coming down the pike.

IA: Gloria, the problem we face is that we can't miss only the bad days. I wish we could, but as the Best and Worst Days charts show, fairly close to some of those bad days are also the best days. Now, I have one more chart to show you, going back to 1950. The question is, if you periodically pull out of the market when things look bleak, as I heard you say you were inclined to do, what's the impact on your portfolio? Suppose in doing so, you miss some of those best days? How's your portfolio going to hold up if you're out of the market when those best days occur?

Gloria: Well, for sure, you're going to reduce the returns. But is it significant?

IA: Gloria, look at the chart. Over this 70-year period, if you stayed invested in the S&P 500 all the time, through both up markets and down markets, your return would have been 7.5% annualized (and that doesn't even count dividends). A $10,000 investment in 1950 would be worth over $1,500,000 by now. But if you missed only 10 or 15 or 25 of those best days, look at how your annualized returns are reduced! Instead of $1.5M, your portfolio might be worth not even half as much, or a third as much, or only a fifth as much. And that's a result of being out of the market during only a couple dozen of the best days!

Investment Price Returns - Staying Invested vs. Missing the Best Days

Gloria: I think what you're telling me is that I have to stay invested, put up with those down days, if I want to have the long-term benefits of investing in stocks.

IA: That's about it, Gloria. There's an old saying in our business that rings true today: "Time in the market beats timing the market." Staying the course is the best plan of action during periods of market stress.

Gloria: Okay. Thanks for the call. And keep that Diet Coke cold for me. We'll get out of this "shelter in place" one of these days.

If a volatile stock market is making you nervous, send us a note or give us a call to talk it over. We can offer perspective and reassurance, and can work with you to design a portfolio that helps you sleep better at night.

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Disclaimer: The information provided here is general and intended as educational in nature. It is not intended nor should it be considered as tax, accounting, or legal advice. Investec Wealth Strategies and its advisors do not provide tax, accounting, or legal advice. We recommend you seek the counsel of your attorney, accountant or other qualified tax advisor concerning your situation.