Investing in Stocks in an Escalating Market Environment – A Few Considerations for Every Investor
/In December 2018, our team wrote a piece called “Losing Money” as a Long-Term Investor. In that article, the primary message was for investors to stay the course with a personal long-term investment plan and to prevent making irrational decisions due to stock market volatility that occurs along the way.
Experiencing a market sell-off, as we did in February through March of 2020, was an extreme example and test of investor nerves and perseverance. The Dow Jones Industrial Average dropped 37% between February 12th and March 23rd. Selling stocks during that period likely resulted in a better night’s sleep and a lot less financial-related stress for the investor.
The flip side of this is that those investors who were able to maintain a longer-term focus by not selling, while also realizing that stock market volatility is the price one pays for higher returns over time, saw the benefits of sticking with their plan over the next several months.
In fact, since the market low reached on March 23, 2020, stock investors have seen the S&P 500 index, which represents the 500 largest companies in the United States, appreciate by over 92% (as of August 27, 2021).
So that begs the question, what does one do now from an investment standpoint after having seen such appreciation in the stock market over the past year and a half? Should I be concerned that another market sell-off like the one that we witnessed in early 2020 is just around the corner?
To answer that question, it is prudent to first say that nobody has an exact crystal ball on what will happen in the markets from one year to the next. Stocks will often increase in value when conventional wisdom might make one think otherwise, and visa-versa.
Because of this, it is important to answer the following questions:
1. Why are you investing in stocks in the first place? and
2. What is your true investment time-horizon - when will you need to tap into your nest-egg in order to address your various goals during your lifetime?
In conjunction with these questions, it makes sense to look back at some historical data in order to see how stocks have performed over different time periods.
As the following chart reveals, the S&P 500 from 1926 to 2015 closed higher 54% of all trading days, 74% of the time for each 1-year period, and 94% of the time for every 10-year period between those years. What is also interesting to see is that there was never a 20-year period when one would have lost money as an investor in the S&P 500 during that 89-year period. In other words, if you are a long-term focused investor, you should feel fairly confident that stock prices will be higher when you need your money.
When reviewing the total return performance (price appreciation + dividends) of the S&P 500 from the time period 1928 to 2021, the rate of positive returns only gets better.
Source: Bespoke
Continuing to look at S&P 500 total returns, below is a chart showing the number of years invested on the x-axis and the percentage of time that positive returns were experienced on the y-axis. There are a few important points to consider from this chart.
· The odds of positive returns rise as your investment timeframe increases and the point at which the curve hits 100% and stays there is at 16 years.
· In the S&P 500’s history, no matter where your starting point has been, all 16-year periods have generated positive total returns.
· Even though it’s not 100%, the fact that over 82% of all 2-year periods have produced positive returns seems to offer up pretty good odds for an investor thinking about putting money into the stock market at any given time.
Source: Bespoke
Despite the data illustrated in this chart, it is easy to understand why a recent college graduate just entering the workforce would be more comfortable than an individual entering retirement due to having a much longer investment time horizon, particularly when considering the 16 years needed to reach 100% odds of achieving positive returns (although past performance is no guarantee of future results).
Time in the Market vs. Timing the Market
The stock market's down years indeed have an impact on investors, particularly those who experience a negative return period at the same time when funds are needed to be withdrawn from one’s investments to a significant degree. Although everybody’s situation is different, it is important to prevent the urge of abandoning owning stocks altogether during such a time.
To provide an illustration of why this is important to consider, as well as the impact of time in the stock market for an investor, take a look at the following example.
Back in 2008, the S&P 500 lost 37% of its value. If you had invested $1,000 at the beginning of the year in an S&P 500 index fund, you would have had $630 or 37% less money invested at the end of the year (a paper loss of $370). Keep in mind that you only would have experienced a real loss if you had sold the investment at that time.
If you instead decided to hold onto that initial investment through the next several years, the $630 investment at the end of 2008 would have increased to $796 at the end of 2009, $915.88 at the end of 2010, $935.20 at the end of 2011 and $1,085 at the end of 2012 (due to market returns of 26.5%, 15.1%, 2.1% and 16% respectively).
In other words, if you stayed invested in the S&P 500 investment, the 2008 down year was not devastating to you as your initial investment would have been recouped by the end of 2012. If you had sold your initial investment, however, and transferred the cash raised into more conservative investments such as bank Certificates of Deposit or Treasury bills, you would not have come close to recovering the value you initially lost over that same time period (partly due to the historically low interest rate environment we have experienced for the past several years).
As I mentioned earlier, no one knows exactly ahead of time when those negative stock market returns will occur. If you choose to invest in stocks, it is important to realize that down-years will occur. By accepting that and having the fortitude to stay invested through a short-term market decline, you will find it easier to stick with your long-term investment plan.
Investing in a diversified portfolio of stocks has produced significant wealth for its participants over time. Remaining invested for the long-haul while managing risk appropriately along the way based on your situation will provide you with an excellent chance of meeting your financial goals.
Please consult with a Clearwater Capital Partners Advisor for not only professional guidance regarding a personalized investment plan for your situation, but also to partner with a true fiduciary who will help you to stay on course with your plan during the future ups and downs of the markets.
