The strong equity returns of 2020 and 2021 seem a distant memory as investors contend with a bear market and stomach-churning market moves. Market volatility can wreak havoc on investor emotions, creating the temptation to trade in or out of the market based on the latest developments.
Investors should fight the impulse to time the market, as over the long term whether you invest is far more important than when you invest.
Although today’s bear market may feel worse than prior bear markets, there are important historical patterns that may be instructive today. Investors should also reconsider the most frequently used definition of risk, as market volatility may be the wrong definition of risk for many investors. With that in mind, here are three investing truths that could be helpful right now.
Truth: Long-term market returns include periods of poor returns
Stocks rarely rise without experiencing setbacks along the way. Since 1980, calendar year returns for the S&P 500 Index were positive in 32 of the 42 years. However, during that 42-year period, the S&P 500 index had an average intra-year decline of 14%.
For investors saving for long-term goals, such as education and retirement, longer-term returns are more relevant than annual returns. Since 1970, the S&P 500 provided positive returns in 90% of five-year periods and 95% of 10-year periods.
Investors choosing to be in cash rather than invest in stocks should know that cash has historically been poor at preserving purchasing power, providing a negative real return after taxes and inflation. According to Goldman Sachs, from 1986 to 2021, cash earned a 3.5% total return, which became 0.8% net of inflation and -0.6% after inflation and taxes. Stocks provided superior returns than cash net of inflation and taxes.
Truth: ‘Prediction is very difficult, especially if it’s about the future’
The quote attributed to Niels Bohr, a Nobel laureate in physics and father of the atomic model, provides cautionary advice for investors who think they can successfully time the market. Morningstar’s annual study of 20-year returns provides evidence supporting Bohr’s (and baseball sage Yogi Berra’s) cautionary warning about the perils of trying to predict the future.
Investors in the U.S. equity market for the full 20-year period through the end of 2021 earned 9.5% per year, while investors who missed the 10 best days saw their returns drop to 5.3% per year. Investors who missed the 20 best days paid an even steeper price, with returns falling to 2.6% per year. Although avoiding the 10 worst days would boost returns, the best and worst days tend to be clustered together, making it nearly impossible to trade with the perfect foresight to capture the best days while avoiding the worst days. </…….
Source: https://www.kiplinger.com/investing/604922/3-investing-truths-to-live-by-right-now-and-always
