I'm going to tell you why it's OK, and even prudent, to stay invested when the market tanks. But first, let's understand something pretty universal about ourselves:
We are all generally averse to loss, and sometimes overly so. Most of us feel more pain when we lose than joy when we win. This is known as asymmetric loss aversion, and it's a real thing. In financial terms: We become much more devastated by the idea of losing money than we become elated at the accomplishment of earning money. This is not a good thing when it comes to investing in the stock market, because you have to be able to tolerate short-term pain in exchange for long-term gain potential.
To this day I still meet with folks who haven't mentally recovered from what the 2007-2009 financial crisis did to their portfolios, even though markets have since recovered to double the levels they reached before the downturn. It hurt so bad at the time to see their account lose value that many moved their 401(k)s and IRAs to cash or fixed income while the market was down, locking in a 30-40% loss. Because of that same fear they never fully or even partially re-invested into equities, missing out on a subsequent 10 year rally that could've literally multiplied their money. Now that the market is at all-time highs, they fear it's too late to invest, so they stay on the sideline waiting for the next crash. Problem is, the next crash might also scare them and prevent them from investing subsequently at that time as well. Their fear of losing money may actually even be causing them to lose money. Lots of money.
So...What if I told you it's perfectly OK to be in the market during a crash? Yep, you read me correctly. What if I told you that being invested during a crash isn't what ultimately dooms investors? Let's discuss....
You see, it's not being invested when the market falls that causes you to lose money. It's quite the opposite. It's not being invested when the market goes up that hurts the most. If you look at the period from 1999-2018, the S&P 500 returned an annual average of 5.62%. Had you just been invested, rode out the Dot.com bubble and the Great Recession and the dozens of corrections/flash crashes/etc in between and since, you could have turned a $10,000 investment in 1999 into $30,000 by the end of 2018. However, if you missed just the 10 BEST days in the stock market during that period, your return potential drops to 2%, and your ending value drops to $15,000. Miss the best 20 days in the market? Now you've actually lost money. Ending value: $9,359.* So how do you avoid missing the critical "best days"? Well, let's understand when the best days tend to happen.
Many of the biggest "up days" in the stock market have taken place very shortly after big drawdowns. They usually follow a big correction or crash. Look at a list of the best days in stock market history and you'll see a pattern.
And therein lies our problem. It's during those drawdowns or crashes that many investors panic and sell because of their loss aversion and fear. They lock in their loss on the way down, after most of the damage is already done, and then miss the pivot point when the market turns and moves higher. Then they either buy back in at higher prices or not at all. They surely may miss a lot of big up days in the process.
And you now know what happens when you miss the big up days.....You could go from 5.6% to 2% to 0% pretty quickly. You could turn $30,000 into $15,000 into $9,350 pretty quickly.
Moral of the story? Don't sell out during a downturn, because it's not the downturn itself that is hurting you. It is your fear and loss aversion that is hurting you. It is the sale of your investment which locks in a loss and causes you to miss the early stage of the next rally that hurts you. Yes, of course it hurts to see the markets down and your account values down. We all feel that pain and that fear at times when investing. That's normal human emotion and you can't necessarily control that. But what you can control are your actions in response to those feelings. If you capitulate and sell under duress, you're probably hurting yourself in the long run. If you endure the duress, understand how the market works long term and stick to your investment plan, I think you'll probably come out alright.
Always remember: Time in the Market > Timing the Market.
*The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments.
The S&P 500 index is unmanaged and cannot be directly invested into. Past performance is no guarantee of future results.
Investing involves risk, including the potential for loss of principal.
This is meant for educational purposes only. It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions.