Think Twice Before Bailing on Stocks

The stock market has been on a rollercoaster ride lately, with the S&P 500 losing more than 16% since its peak in February. The culprit? Uncertainty around President Donald Trump’s tariffs and the broader trade war, which has left companies, households, and investors feeling jittery. But before you hit the panic button and sell your stocks, consider this: market downturns are a normal part of investing, and history shows that staying the course often pays off in the long run.



Financial advisers often recommend against selling during market downturns for several key reasons. Firstly, selling locks in losses and prevents the chance of making the money back over time. Historically, the S&P 500 has come back from every one of its downturns to eventually make investors whole again. This includes recoveries from significant events such as the Great Depression, the dot-com bust, and the 2020 COVID crash. For instance, the market downturn of December 2021, spurred by the Russia-Ukraine war, intense inflation, and supply shortages, took 18 months to recover. In contrast, the COVID downturn of March 2020 recovered in just four months, the fastest recovery of any market crash over the past 150 years. These examples illustrate the unpredictability of market recoveries and the futility of trying to time the market.

Secondly, it is nearly impossible to time the market effectively. Odysseas Papadimitriou, CEO of WalletHub, states, "Data has shown, historically, that no one can time the market. No one can consistently figure out the best time to buy and sell." This is validated by the fact that the S&P 500 has seen declines of at least 10% every year or so, and these downturns are often followed by recoveries. For example, the market downturn of December 2021, spurred by the Russia-Ukraine war, intense inflation, and supply shortages, took 18 months to recover. In contrast, the COVID downturn of March 2020 recovered in just four months, the fastest recovery of any market crash over the past 150 years. These examples illustrate the unpredictability of market recoveries and the futility of trying to time the market.

Thirdly, missing out on the market's best days can significantly reduce long-term returns. According to a Wells Fargo Investment Institute analysis, over the past 30 years, the S&P 500 stock index had an 8% average annual return. However, investors who missed the market's 10 best days over that period would have earned only 5.26%, a much lower return. This trend continues as missing more of the best days results in even lower returns, highlighting the importance of staying invested during volatile periods. For example, "Investors who missed the market's 10 best days over that period would have earned 5.26%, a much lower return, it found. Further, missing the 30 best days would have reduced average gains to 1.83%." This data supports the advisers' recommendation to stay invested and avoid emotional decisions during market downturns.



Psychological and emotional factors significantly influence investors' decisions to sell during market volatility. When the market experiences significant drops, investors often feel a sense of panic and fear, leading them to sell their holdings to avoid further losses. This emotional response can be detrimental, as selling during a downturn locks in losses and prevents the chance of making the money back over time. Historically, the S&P 500 has come back from every one of its downturns to eventually make investors whole again, including after the Great Depression, the dot-com bust, and the 2020 COVID crash. Odysseas Papadimitriou, CEO of WalletHub, emphasizes that "data has shown, historically, that no one can time the market. No one can consistently figure out the best time to buy and sell."

To mitigate the impacts of these psychological and emotional factors, several strategies can be employed:

1. Long-Term Perspective: Investors should focus on their long-term goals rather than short-term market fluctuations. As Stephen Kates, financial analyst at Bankrate, advises, "now is not the time to make emotional decisions." Young investors, in particular, have the gift of time and can afford to ride out the waves, allowing their stock portfolios to recover and grow over the long term.

2. Diversification: Diversifying investments across different regions and sectors can help reduce risk. Phil Battin, CEO of Ambassador Wealth Management, advises leaning towards "resilient sectors such as consumer staples, utilities, and health care, which are less reliant on international trade." This strategy can soften the blows of market volatility and provide a more stable investment portfolio.

3. Staying the Course: Experts often recommend not putting money into stocks that you can't afford to lose for several years, up to 10. Emergency funds should not be invested in stocks. By staying invested and avoiding emotional decisions, investors can benefit from the market's historical tendency to recover and reach new highs.

4. Avoiding Market Timing: Attempting to time the market by selling during downturns and buying during upturns is generally ineffective. As Lee Baker, a certified financial planner, notes, "Getting in and out of the market, it's a loser's game." Missing the market's best days can significantly reduce returns. For example, over the past 30 years, the S&P 500 had an 8% average annual return. Investors who missed the market's 10 best days would have earned only 5.26%, and those who missed the 50 best days would have seen returns of -0.86%, which wouldn't have kept pace with inflation.

By adopting these strategies, investors can better manage the psychological and emotional impacts of market volatility and make more informed, long-term investment decisions.