Requirements and Guidelines for Long-Term Investors
By Professor Pierre Fourner
Stock markets have fallen dramatically as a result of the coronavirus pandemic. Many investors have seen their investments drop significantly in value. But if we look back to the 2008 crisis and other times of financial stress, there are lessons to be learned that we can apply to what's happening right now. Here is some advice on how to manage your investments amid market turbulence.
Getting out right now isn't the solution
Taking your money out of the markets amid the volatility we're seeing right now will only address half of the problem. Yes, it will cap your losses, but then you're faced with the challenge of deciding when to reinvest, with no less uncertainty about where the smart opportunities are. Additionally, past experience shows that very few people end up coming out ahead. The key to long-term returns is how long you keep your money in the market, in line with your investor profile and risk tolerance—not how long you spend waiting on the sidelines.
Avoid the temptation to sell on a bad stock market day
Between 2000 and 2018, the S&P 500 generated an annual compound return of 8.5%. An investor who had their money out of the markets for just 10 of the best days during that period would have only earned about half that (4.5%). And the best days usually follow the worst ones, which aren't exactly possible to predict. The lesson? If there's a bad day in the markets, you're better off staying put so you don't miss the rebound.
Now is not the time to put all your eggs in one basket
It's rarely a smart strategy to have 100% of your money in the same asset class, whether that's stocks, bonds, or cash. Even with the recent market volatility, we've seen how important it is to diversify. Yes, it's been a particularly brutal time for stocks since February, but there's been some relief for those losses on the bond market after the recent string of interest rate cuts, something else that would have been hard to predict. Cash can be a good option for short-term peace of mind, but it's unlikely to deliver returns that even match inflation. The longer you hold cash, the more purchasing power you lose. The real value of cash isn't in its returns, but in being able to use it to seize investment opportunities as they arise.
Market corrections are cyclical and can hold good investment opportunities
For the S&P 500, the average largest decline (market high to market low) in each year dating back to 1980 is about 14%. That's nothing to celebrate, but it does illustrate that big drops are normal. Plus, even in years when there's been a significant decline, the year has ended in positive territory 8 times out of 10.
Keep calm and carry on
History has shown that bull markets are stronger and last longer than bear markets. The 16 month period between October 2007 and March 2009 was a terrible time for investors, with a 56% loss on the S&P 500. But the lower the low, the higher the rebound. The next bull market ended up lasting 11 years, with the S&P generating a total return of 522% between March 2009 and its peak in February 2020. And over the course of the entire cycle, from October 2007 to February 2020, the index's overall gain was still 183%.
For more guidelines, check out Professor Pierre Fournier's previous article on important guidelines to survive a stock market panic.