The market has tested our patience and resolve this year. We’re only about five months through the year, and we’ve already dealt with sticky inflation, global conflict, political discord, and declining consumer sentiment. But it is precisely at times like these that we want to reiterate a few important things about investing:
Some of the worst days in the market are often around some of the best days, and we can’t afford to miss the best days.
During down times in the market, we cannot allow our emotions to propel us to make quick, rash decisions. A JPMorgan article titled, “Impact of Being Out of the Market” by Samantha Azzarello and Katherine Roy provides insight into these situations: “Despite all of the educational efforts and prudent processes provided by financial advisors, investors may be tempted to take control in a way that is likely to be detrimental to them – by retreating or selling out of the market after a significant drawdown – locking in their losses and looking to re-enter when the market feels ‘safer’. This behavior is driven by loss aversion – in this situation, the desire to avoid additional losses because losses are so much more painful than gains are positive. What most investors aren’t aware of is how closely the best days often follow worst, and how important those good days are to the recovery of a … portfolio.”
The chart on slide 44 from JPMorgan’s Guide to Retirement for 2022 helps illustrate the importance of being invested during the best days of the market:
We can assure ourselves of participating in the best days by always staying invested, and by avoiding the temptation of trying to time getting in and out of the market. “Overall, timing the market hurts returns through the worst and best days clustering together… the worst and best market days are just like rain and rainbows. Generally a rainbow appears only after a thunderstorm. While intentions to miss the rain are valid, we will likely miss the rainbow that follows.”
To read and view the full article by Azzarello & Roy, click here.
What could go right?
Although it is good to be aware of risks and prepared for the negative possibilities of the markets, we often forget to think about what can go right. If inflation starts dropping, a resolution to the war in Europe surfaces, earnings continue growing, or an unexpected bout of positive economic data comes to light, we may be kicking ourselves later if we weren’t invested in the markets. By no means are we predicting any of these things are necessarily imminent, but you never know what the future holds, and it’s good to be ready and positioned for what could go right instead of just for what could go wrong.
Adding money when the market is down at times of uncertainty can pay off.
Although it may not feel like a good time to invest during uncertainty and when the market is down, it can really pay off in the long run. There are always reasons not to invest, but looking past the next month and further into the future gives us a glimpse of how we can benefit from investing new money consistently and staying invested. A chart from a JPMorgan article from February 2022 titled “The Case for (Always) Staying Invested” by Elyse Ausenbaugh shows historical evidence of markets weathering the storms that are inevitable:
To read and view the full article by Ausenbaugh, click here.
JPMorgan’s Weekly Market Recap on 5/16/2022 said: “…while market volatility may continue, the sell-off has brought stock valuations down to much more reasonable levels… while earnings estimates have remained resilient. Further, history suggests that periods of gloom may be among the best times to buy equities. Indeed, following eight rather obvious troughs in consumer sentiment over the last 50 years, subsequent 12-month S&P 500 returns averaged almost 25%. Because of this, investors would be wise to keep their emotions in check, and invest based on the logic of current valuations and long-term prospects, rather than negative emotion in this difficult time.”
If you are able to bring in new money to invest that you won’t need for multiple years, now may be a good time to do so.
We know times like these aren’t the easiest moments in the journey of investing.
We do know that as we stay disciplined in our approach to investing, we can reap the rewards down the line. Part of our process involves rebalancing, which can be beneficial at times like these. We urge you to stay the course. We would love to go over any of your questions. Feel free to reach out anytime! We are here for you.
Christian Covey, Chief Investment Officer
Thank you to Aaron Christensen, one of our great interns, for his help in researching for this article.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The opinions expressed in this material do not necessarily reflect the views of LPL Financial.