A big part of our job as a financial advocate for our clients is keeping them focused on the forest, rather than the trees. Last month, we highlighted the first in a series of three charts put out by Charles Schwab’s Center for Financial Research.
This month, we’ll take a look at another chart put out by Schwab and examine the importance of holding on during market declines. This advice flies in the face of those market pundits who make it sound easy to jump in and out of the market, to avoid the dips while still taking part in all the gains. In reality, this rarely works and never does so consistently.
In the chart below, the blue bar shows how the market did for the year (as measured by the S&P 500), while the red dot shows the largest intra-year decline within a particular calendar year. For example, in 1980 there was a 17% decline at one point during the year, but stocks still finished up 26%. That’s a range of 43%, top to bottom. Another year worth pointing out is 1987. Remember Black Monday? October 19, 1987, saw stocks plunge 22.61% in one of the bloodiest days ever on Wall Street. In fact, stocks endured a 34% decline peak to trough during 1987 but still managed to finish the year up 2%. Quite a recovery.
There are other examples like these, specifically 1998 and 2009, which saw stocks suffer big during the year, only to end on a very strong note. And yes, there are years where the market finished down significantly, but in every case, they had recovered at least somewhat by year-end.
2016 saw its own version of this with the Brexit vote. Stocks sold off sharply following the unanticipated decision by Britain to leave the European Union. The markets quickly recovered the loss and have hit new highs since.
The chart above reminds me of the Hollywood actor, director, and producer Martin Gabel, who once said, “Don’t just do something, stand there!” There are investors and there are traders. Leave the market timing to traders. If you want to build wealth over a long period of time, you must be patient and ride out the ups and downs.
As always, past performance is not indicative of future returns. Before investing in stocks, you should consult your financial advisor to find out if stocks are right for your particular financial situation.
