Volatility Revisited
We stress the importance of staying invested. The reason is because panic selling can significantly lower returns for long-term investors, which can impact their ability to achieve their financial goals.
This is particularly relevant give the outbreak of the Omicron variant, which is proving to be highly contagious and appears to spread rapidly. We don’t know what the spread will look like in places with higher vaccination levels, nor do we have any information on Omicron disease severity. This creates uncertainty and volatility in the stock market, like we had on Friday.
Experts are suggesting that they should have a better read on in vitro vaccine efficacy and Omicron disease severity by mid-December. mRNA vaccines are also relatively easy to alter and the approval process for a reformulated vaccine could take 4-6 weeks.
In the meantime, it’s easy to forget the S&P 500 is 25%+ higher than it was a year ago. Market volatility is inevitable and, most of the time when it occurs, the market tends to rebound and typically more quickly than we remember.
The best days in the market tend to occur within days or weeks of the worst days in the market. Recapping 2020, it’s pretty easy to see in the below how this played out.
When stocks plunge, a natural impulse can be to hit the sell button. An investor who decides to “go to cash” and exit the market as soon as the market moves down is making an emotional decision based on fear. It’s important to recognize that we’re prone to make bad decisions when our emotions get the better of us.
Source: The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. The above data represents past performance, which is not a guarantee of future results.
Given the state of fear an investor is in when making the decision to go to cash, the odds of making a split decision to reinvest and catch the best days amidst the worst days are slim to none.
In this case, an investor would rather be relieved not to risk “losing any more money” and will typically only re-enter the markets when an uptrend has been reestablished and FOMO (fear of missing out) replaces the fear of the market going down.
By the time FOMO takes over, you’re likely to have missed the best days in the market, which can permanently lower your long term investment performance.
An investor who missed the S&P 500’s 10 best days in any decade achieved total returns that were significantly lower than the return for investors who simply stayed invested and waited it out.
Of course, avoiding the ten days of any year or decade would be great for long-term performance. But given the difficulty of precisely calling the best and worst days, the prudent bet is simply to stay invested and wait for the storm to pass.
Given that we are helping our clients to identify and create a plan to help them meet their long-term goals, it’s important for us to reinforce that volatility is normal and the best thing to do when volatility occurs is typically nothing. As mentioned here on March 23, 2020, just stick to your plan.
The outbreak of the Omicron variant last week created uncertainty and uncertainty creates volatility in the stock market. If you think about where we are today in terms of our understanding and treatment of COVID-19 versus the spring of 2020, then it seems reasonable not to panic this time around. The market’s mood can change quickly and missing the best up days is not a risk worth taking.
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