You probably haven't forgotten the steep market drop in January, 2016, and the stock market correction in the summer of 2015 might not feel too far in the past. But the market crash in 2008 is likely starting to seem more like a distant memory, especially given the fact that many investors' portfolios have grown substantially since the market hit bottom in 2009.
That's not to say that those market lows weren't unpleasant in the moment, but the lesson to be learned is this: Over time, investors who stay the course through a decline recover. In fact, from 2009 to 2016, the market has tripled, with the S&P 500 growing by 194 percent. But what about investors who didn't stay the course — who, in attempts to cut their losses, sold?
Unfortunately, many investors who sold their portfolio holdings during the crash of 2008-2009 still haven't fully recovered, highlighting one of the most compelling reasons not to sell during volatile times. But that's not the only reason to fight the urge to sell when the market heads south; here's why selling after a downturn is not an effective wealth management solution.
Selling to Avoid Loss: Not a Sound Wealth Management Solution
Why do so many investors react to down markets by selling off their holdings? It's easy to understand the instinct; no one wants to lose money, and loss aversion tendencies cause many investors to react emotionally to market volatility. Put simply, they think they'll lose less money if they sell.
Ironically, the exact opposite is true: They definitely lose money when they do sell. Since the crash of 2008, there have been eight market pullbacks. Investors who hung in there and followed their long term financial plans through the events of 2008, 2009, up until today have seen almost double the growth.
Generally, an upswing follows a downswing. Historically, since the 1930s bear markets average 18 months in length with an average stock decline of 40 percent. In contrast, bull markets gain an average of 440 points and last for an average of 97 months, about five times longer. This means if you can stick to your guns and hang in there through the bad times, you'll be in a better off than those who reacted emotionally and sold. The biggest risk to you isn't losing that 40 percent in value — it's missing out on that 194 percent gain.
Wealth Advisors Discourage Market Timing
Then there's the fact that timing the market — also known as stock picking — simply doesn't work. Jumping in and out of the market in search of that next "hot stock" or trying to avoid the bottom just isn't a sound wealth management strategy. Though you'd never know it if you pay attention to the financial media, even investment professionals aren't able to time the market and pick the best performing stocks, year after year.
In fact, quantitative research shows time and time again that the market isn't predictable, asset classes don't behave in a consistent manner, and that so-called actively managed portfolios simply under perform. According to Investopedia, more than half of the highest performing days on the market take place within two weeks of the 10 worst performing days. Missing out on those high days costs investors a lot more than not missing out on those low days.
Stay the Course: Stick with Your Comprehensive Financial Plan
As a rational investor, you've worked with your wealth advisor to create a long term, comprehensive financial plan — one that's truly diversified, employs proper asset class allocation, and takes your goals into account. Your financial plan is based on your own specific time horizon, and that means you shouldn't let the short term movements of the market affect your decisions.
When your time horizon is decades long, market pullbacks and downturns are just blips on your radar, rather than defining events. By keeping your eyes on your goals and leaving your emotions out of your decision-making, you can focus on the long term, rather than reacting to the short term.