Global stocks have been bouncing up and down—but mostly down—for all of 2022. This is not an atypical market, for example, 2020 was much more volatile, and most stock asset classes dropped much farther that year than they have so far in 2022. But a six-month stretch (and counting) of prolonged volatility and a net decline can tax the psyche. I remember it did in 2018 when we saw virtually the same returns pattern culminating in the worst Christmas Eve for stocks in history.
In market environments like this, I always worry that a few clients might be at risk of “volatility fatigue,” or the hopeless dread that creeps in when you see your portfolio has lost ground temporarily and there is no sign of good news that would provide a catalyst for a recovery. And when volatility fatigue turns into an urge to bail out of your portfolio and wait for better days to come, you’re in real trouble. So let’s try to head this one off at the pass.
No matter how bad recent returns have been, you don’t want to sell stocks. Why? Most of the best stock returns come unexpectedly but immediately after the sharpest declines. Missing these surprise rebounds can have a tremendously detrimental effect on your long-term wealth.
Consider the chart below showing what happens if you missed the best week, month, quarter, or half-year period for stocks over the last 25 years. These periods came immediately after a considerable stock market collapse. In my experience, the odds that an investor who succumbs to volatility fatigue and sells stocks will miss one of these strong surges is high.
Take a look…
What are the odds you would have missed the best week—the five days ended November 28th, 2008? Pretty good, I’d say, given that the S&P 500 ETF had lost 24.9% in the preceding three weeks starting on November 4th! What happened if you just missed the best week for stocks over the last 25 years? Your return would have fallen 0.8% per year—from the +9.8% total period return to just +9.0% annually. The dollar loss is equally staggering.
What about the best month? Again, pretty good odds, I’d say. In the prior month ended March 23rd, 2020, the S&P 500 ETF had lost 30.4%. The urge to sell stocks would have been strong and ultimately costly. Missing just the best month in the last 25 years reduced your return a full 1% per year to +8.8% annually. The $2,000 less ending wealth compared to staying invested was about double your starting amount.
The best three months, no surprise, include the best month previously mentioned, and of course, come on the heels of the worst 30-day decline for stocks in modern history. Miss the best quarter and your annualized return had fallen to just 8.3% per year, 1.5% annually less than just staying invested.
Finally, the best six-month period came immediately after the S&P 500 ETF had dropped 47% in value over the prior six months! Staying invested after seeing almost 50% of your wealth temporarily disappear is no easy task. But missing this stretch would have been incredibly costly—your annualized return had dropped to just +7.9% annually, about 2% less than simply staying invested. You had so much less wealth by missing the best six-month period that it would have taken you five more years of +10% per year growth to catch up to where you would have been if you just stayed put!
Hang In There…
I understand that temporary investment losses are frustrating—we all long for the portfolio values we had just six months ago. But declines like what we’re living through are common and to be expected. We need premium volatility if we’re to expect the premium returns that diversified stock portfolios have historically offered.
Realize this: You don’t need to avoid these declines to achieve your financial goals. Over time a well-diversified stock portfolio should produce strong returns despite the declines. The reality is far more counterintuitive—most people get sub-par investment returns not because they lose too much when stocks decline but because they react to the declines by selling their stocks and inevitably missing the equally strong recovery. Mistiming the market could cost you growth that will take years to make up. Don’t do that to yourself.
It’s OK to feel fatigued by the volatility. It’s just not OK to act on the urge. Stay invested, and trust your plan. If you don’t have a plan, now’s a good time to get one started. If you want to chat—whether you’re a Servo client or someone looking for help, you can schedule time with me here.
Source of data: Yahoofinance.com daily prices for SPY
Past performance is not a guarantee of future results. Index and mutual fund performance includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. This content is provided for informational purposes and should not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.