Natalie and I are not medical experts and cannot provide guidance on the health implications surrounding the coronavirus. However, our intention is to help those in need during this uncertain time by using our expertise in financial planning. As CERTIFIED FINANCIAL PLANNER™ professionals, we want to help educate you on the importance of staying invested in uncertain times.
The coronavirus is creating widespread fear and causing markets to become extremely volatile. The most common mistake of investing during a potential downturn is to sell your investments. Investors without a long term plan tend to follow short term news headlines and make poor, reactionary decisions.
Many investors or traders attempt to capitalize on large market swings during volatile times. This type of investment strategy is called “market timing”. Investors that practice market timing try to identify the best time to be invested in the market and when to get out. Market timers attempt to buy and sell investments using certain metrics or worse, on feeling. Here is the problem with market timing - investors risk being out of the market when it may unexpectedly rise, potentially not participating when the best performing times occur.
For example, let’s say you decide to sell all of your stock in your 401(k) and hold it in cash for the next month. What happens if the market rises 20% in the same period and your money was not invested? Now you are further behind in your investment goals and playing catch-up. When this happens my guess is that you’ll consider market timing again to make up the difference. It is essential to stay invested during uncertainty.
In fact, staying invested is so critical that if you missed only 10 of the best performing days of the S&P 500 between 2000 and 2019 your investment return would decrease by 50% compared to staying fully invested.
Wait…missing only 10 days has that big of an impact? Check out the chart below.
Please take time to comprehend the chart above before moving on.
What this means is that if you were not in the market for those 10 days over the course of 20 years your return diminishes drastically. By not investing during the 20 best days over the same time period you are essentially breaking even with no growth to show for 20 years! Missing 30+ of the best performing days and your return is negative.
According to JPMorgan, 6 of the 10 best performing days of the S&P 500 occurred within 2 weeks of the 10 worst performing days. In fact, the best performing day of 2015 was August 26 and the worst performing day was August 24 - yes, separated by only 2 days!
The clarity we seek to provide you with is that market movements happen. Market corrections and economic recessions are part of the natural cycle. By reacting negatively to shorter term issues, you risk your future investment potential in the long run. What’s most important is staying invested.
Here are some of our tips for long term investing during uncertain times.
Please do not hesitate to contact us with any questions or concerns you have during this time.
Disclaimer: This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.