We’ve all heard the old adage to “buy low, sell high,” but the reality is, some investors do just the opposite—they buy high and sell low. Taking a look back at market history, while factoring in behavioral science, shows us not only why investors react this way, but more importantly, how they can avoid it. If we have a better understanding of market volatility, the risks of certain investment strategies, and the value of a thoughtful investment plan (that you can stick to), we can invest with confidence and stay on track in pursuit of our goals.
Investing with confidence: Money means emotion
Investing with confidence: Why it’s important to separate from the herd
Investing with confidence: Keep your view on the horizon
Experiencing a major pullback in stocks is never a comfortable feeling. But when stocks seem to keep falling, that’s when it’s most important to try and block out the daily headlines and keep perspective of how stocks have historically performed over the long term. After all, the majority of market participants are long-term investors, not day traders, as the financial media would have its viewers believe. Short-term volatility comes in waves, but stocks have an extremely attractive track record over the long term. The Dow Jones Industrial Average, which has a longer history than the S&P 500, has trended up overall over the past 120 years, despite several downturns throughout history.1
Even if you look at shorter time periods, since 1950, the S&P 500 has risen 83% of the time across a five-year horizon and 100% of the time across a 20-year horizon.2 When starting from an already depressed market, the risk/reward tradeoff is even more appealing.
While past performance is no guarantee of future results, history can be a helpful guide for future possibilities. Since 1980, the S&P 500 has had 25 corrections, meaning the index declined 10% or more from a high point, and it always recovered. And not just recovered but recovered tremendously well. In fact, the average return after a correction was more than 23%, according to Ned Davis Research.
Markets face declines for many reasons: world events, political uncertainty, economic policy, and the performance of certain companies, just to name a few. But overall, market declines happen because of uncertainty. Investors worry that whatever events are occurring could mean businesses lose money, so they sell.
For example, in the COVID-19 crisis investors saw businesses closing and consumers forced to stay at home, which meant those businesses would lose money and be worth less than before. So investors sold. And sold and sold some more.
But when the future becomes clearer, investors often buy back into the markets. They see potential for making money. In the COVID crisis, when good news hit the wires and states started opening back up, investors bought back in. They saw the potential for businesses to grow again.
If you think about it, this ebb and flow makes sense and is necessary if we’re to make money when investing. When stocks decline, there’s opportunity to buy at a lower price and get a higher return on the backside. When stocks are high, we can sell, making money, but of course, ultimately forcing another ebb.
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1. Source: LPL Research, Ned Davis Research 04/29/22. Past performance is no guarantee of future results.
2. Source: LPL Research, FactSet 04/29/22. Analysis is based on monthly data. Dividends are excluded from the analysis. Indexes are unmanaged and cannot be invested in directly. S&P 500 Index performance before 1957 is based on the predecessor index, the S&P 90. Past performance is no guarantee of future results.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
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