Although the market in the last few months has felt like a ride on the Wild Mouse, it is important to remember that the ride comes to an end. You may be safer by ignoring the churning in your stomach and sitting tight, rather than to trying to jump off.
What is the biggest danger to your long-term investment results? If you answered “market downturns” or “downside volatility,” you are not only missing a bigger danger, you may be missing the way investment markets work.
If we look back at the history of the stock market, there have been many market setbacks since 1896. Yet, the overall trajectory of the market has been a fairly steady rise. As long as you did not panic and sell everything at the bottom of the market, the recovery time from the Great Recession of 2008 and 2009 was just six years.¹
(View full chart at www.marketwatch.com/story/the-dows-tumultuous-120-year-history-in-one-chart-2017-03-23)
The longest recovery times in modern history—25 years during the Great Depression, and 16 years during the stagflation period of the 1970s—are also the only times when someone with a time horizon of more than 10 years would have seen a loss after hanging in for the full decade.
Fortunately, time is on your side. Even if you are close to retirement, statistics show that the average American is going to spend 25 to 30 years in retirement², plenty of time to recover from the average downturn or recession. Staying out of the market could expose you to a much greater risk — because of much longer life expectancies than our parents’ generation, many people will need the long-term growth of the market in order not to run out of money in retirement.
What is a bigger danger than a downturn or recession? Investment experts talk about a human failing called “policy abandonment.” This is a fancy way of saying that the investor bailed out on the markets, generally at the wrong time. Suffering a significant decline in the Great Recession was temporarily painful, but what about the people who abandoned their portfolio allocations and retreated to cash at or near the bottom, because they just got too nervous about what the market would do the next day or the day after? They locked in those losses, moved to the sidelines and found themselves with permanent—rather than temporary—portfolio losses.
The lesson of the chart, as its author Chris Kacher points out, is that the stock market is long-term driven by the intelligence, creativity, innovation and hard work that people working in various companies put into their jobs every day. The value of companies tends to rise, but fear sometimes makes people sell their stock at lower prices which, up to now, have always recovered to reflect that growing value.
The current market volatility is nothing compared with the Great Recession, the Great Depression—or, probably, the next significant bear market, whenever it comes. That next downturn will present us with the illusion of danger (a temporary market decline). Do not trade the illusion of danger with an embrace of real danger— “policy abandonment” — that makes temporary losses permanent.