For investors bold enough to take some amount of risk, the rewards over time tend to compensate them fairly.
However, in times of economic uncertainty or volatile markets, many investors start to sweat as the “paper value” of their investments goes down. For extreme circumstances, this can lead to a panicked decision to sell – often at a loss.
This counter-intuitive decision is the opposite of the “Buy Low! Sell High!” investor principle, and leads to the destruction of an often well designed long term financial plan.
One thing that investors sometimes forget is that markets WILL go down. It isn’t a question of ‘if,’ but rather ‘when, how much, and for how long?’ This is the nature of the investment market and the reason why, over time, there is a premium to be earned over ‘guaranteed’ type investments.
Even during times of relative financial prosperity and growth, doubt can still creep into the minds of investors.
Thoughts might turn to, “My investments have had a great return this year. Things are bound to change, and the market has to go down. I should sell!”
During this time, it’s important to remember the same principles that led you to invest in the first place. If you have a plan implemented, and you are investing for a future long-term goal, staying the course is almost always the right advice. It is nearly impossible to accurately predict the volatile nature of the investment markets.
To better understand this, take into account the research presented by Capital Group, where they followed the S&P 500 index over 20 years ending December 31, 2018. If we imagined an investor, who invested $10,000 every year on exactly the right day (when the market was at its lowest), at the end of the 20 years, they would have $546,793 (an average annual compound rate of return of 9.16%).
Of course, the odds of correctly guessing the market’s best day for 20 consecutive years are astronomical, so we know this isn’t a sound basis for a financial plan.
However, most of us tend to be a bit cynical about our own luck. So, say for 20 consecutive years, you were to invest $10,000 on the worst day (the market high for the year). The result? You’d have grown an investment to $415,560 (a somewhat surprisingly robust average annual compound rate of return of 6.91%).
By not giving in to the temptation to sell and “change your luck,” you’d be strongly rewarded for staying invested.