If you’re like most investors, you’ve probably been hit pretty hard here in 2022. As of mid-July, the S&P 500 index was down almost 19%… this, after having gained almost 27% and hitting all-time highs just the year before. The turnaround was sharp, as investors started heading for the hills toward what they thought was safer ground.
While some people may have had good reasons to jump out these past two quarters, it’s likely that a large number of investors did it simply out of fear. What have we seen? The tech-heavy NASDAQ down around 27%. Dow Jones down about 14%. The Russell 2000 down 22%. With such big drops in just six months, there’s a human instinct to try to do something about it. The problem is that “doing something” almost never works out well.
If you look throughout history, you’ll see that the worst days in the market were very often followed by some of the best days in the market. And when fearful investors bail out after a drop, by doing so, they wind up missing out on any potential recovery. Remember the end of 2018, when the S&P fell more than 9%? People who jumped ship missed out on the 8% total return gain that happened in the S&P just one month later. The result, as a DALBAR study showed, is that the average investor winds up lowering their overall returns significantly.
So, with that information in mind, it’s a good idea to take notice of a few things:
Corrections Happen Often
First, corrections in the market happen almost every year. In 21 of the last 41 calendar years – that’s more than half of the time – the S&P 500 saw a double-digit pullback within the year.
In every year since 1980, there’s been a market pullback, and, on average the market experienced a 13% decline. In the years when the S&P did experience a double-digit decline, 13 of those 21 times – that’s 62% of the time – the market ended the year with a positive return.
Consecutive Years with Negative Returns are Rare
Second, you should know that it’s pretty rare for the broad market to post negative returns for two straight years. It’s really only happened three times—once in the 1970s, once in the early 2000s, and way back in the Great Depression. That’s no guarantee it won’t happen this time, but it’s important to keep those statistics in mind.
Over Time Stocks Tend to Go Up More Than Down
The third thing to remember is that stocks have historically gone up more than they’ve gone down. Since 1926, equities have posted positive returns over a 10-year period 94.6% of the time—and over any 15-year period 99.8% of the time. And stocks over long periods of time have far outperformed money markets or government bonds. A $1,000 investment in T-bills in 1926 is worth around $20,000 today. That same investment in U.S. small-company stocks is now worth more than $5,000,000!
The point here is that the more you resist your first impulse to sell in a panic, the better off you potentially are once the market recovers. This is why we have a Bucket strategy. Knowing that the equity bucket won’t be needed for ten or more years often gives people the assurance they need to keep calm, and simply enjoy their retirement.
Because – believe it or not – sometimes the best thing you can do is nothing at all.
How can we help you the most? Just give us a call.
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S&P 500 Index is an unmanaged index and includes a representative sample of large-cap U.S. companies in leading industries. An investment may not be made directly in an index.
NASDAQ Composite Index is an unmanaged index and measures all NASDAQ domestic- and international-based common stocks listed on the NASDAQ. An investment may not be made directly in an index.
Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA was invented by Charles Dow back in 1896.
Russell 2000 Index is a small-cap index consisting of the smallest 2,000 companies in the Russell 3000 index, representing approximately 8% of the Russell 3000 total market capitalization. An investment may not be made directly in an index.
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Treasury securities are backed by full faith and credit of the U. S. Government but are subject to inflation risk.
Danielle Accardi is a registered representative with, and securities and advisory services offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The investment professionals are affiliated with LPL Financial and are conducting business using the name Accardi Financial Group, a separate entity from LPL Financial.