Keeping a portfolio with a healthy mix of assets that are properly diversified may allow you to weather market shocks more easily.
Focus on the Long-Term When Stocks Go South
A sharp decline in the stock market can generate predictions of doom around the water cooler or in the supermarket check-out line. Even sophisticated investors are not immune to succumbing to fear and making a decision to sell at exactly the worst time. Investors might be better off shutting out the sound, taking a deep breath, and focusing on the long term.
“Staying invested during market downturns, even severe ones, can be the best long-term choice,” said Joe Correnti, senior vice president of brokerage product at Scottrade. “Substantial recoveries often happen in close proximity to selloffs, and missing out on even one strong up day can have a significant negative impact on your portfolio.”
The following chart from Morningstar demonstrates how being out of the market during the most positive month of a year impacted annual returns in the stock market from 1970 to 2014.
In 6 of the years shown, missing the best month would have dragged otherwise positive annual returns into negative territory for the year.
“It’s certainly challenging to watch your monthly investment statements going down, when markets decline,” Correnti said. “But history has shown time and again the benefits of hanging in there.”
The following chart displays the cost of staying out of the stock market following the global financial crisis of 2008-2009. A $100,000 investment in 2007 dropped to $54,381 in February 2009, a decline severe enough to rattle even the most experienced investor. By staying invested in U.S. large cap stocks, however, the initial $100,000 would have grown to nearly $175,000 over the following 82 months. The chart shows both the negative impact of cashing out at the market trough and of investing in cash for one year before reinvesting in stocks.
“Of course, investing in stocks does carry risks,” said Correnti. “Holding a portfolio of stocks for the long term does not guarantee a profit. But staying invested can have significant rewards. Investors can be especially sensitive to risk during market downturns. But missing out on potential gains can be an even bigger risk.”
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Scottrade Brokerage President Peter deSilva was drawn to the firm by its client-first approach. This approach was demonstrated with the company named “Highest in Investor Satisfaction with Self-Directed Services” by J.D. Power.