IMPORTANT DISCLOSURE INFORMATION
The following presentation by New England Capital Financial Advisors, LLC (“NECFA”) is intended for general information purposes only. No portion of the presentation serves as the receipt of, or as a substitute for, personalized investment advice from NECFA or any other investment professional of your choosing. Please see additional important disclosure at the end of this penetration. A copy of NECFA’s current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.newenglandcapital.com.
Fear of Loss in Volatile Markets
As you’ve probably heard, a month ago on February 19th, the popular S&P 500 stock index reached at an all-time high. But since then, the index has come down and last week was down 10% from the peak – what the industry calls a “correction”. This understandably has stirred a lot of fear with many investors questioning their investment choices and wondering what to do, because when the stock market’s falling, the natural fear response is to get out.
What we’re going to talk about today is whether it makes financial sense to follow that instinct.
Based on history, no, it usually doesn’t work out for the better when you make investment decisions based on fear and there are two main reasons for this.
First, the ups and downs in the market are inevitable, but making predictions about them is just about impossible. And second, there’s a big cost to sitting on the sidelines and risking missing the important recovery days. So let’s look at this more closely.
According to data compiled by Fidelity Investments, since 1980, the S&P 500 has experienced a 5% or more decline in 41 out of those 44 years, and a decline of 10% or more during about half of those years. That means you can expect a 5% drop to happen almost every year and a 10% or more drop to happen every other year.
And it’s not just corrections we can expect but also, thankfully, we can expect recoveries. According to analysis from Capital Group, every S&P 500 decline of 15% or more since the 1930s has been followed by a recovery.
So we know corrections and recoveries are a regular part of stock investing. The problem is that there really is no reliable way to predict WHEN a correction is going to happen, how deep it’ll be, and when the recovery will begin. Analysts who study the market day in and day out consistently fail at making these types of predictions.
Which brings us to the second reason it usually doesn’t pay to follow your fear instinct. There is a heavy cost to missing the good market recovery days.
Even missing out on a small number of up days can take a big toll on your returns. A hypothetical investment of $1,000 in the S&P 500 made in 2014 would have grown to $2,581 by the end of 2023. But if that investor missed just the 10 best trading days during that period, he or she would have ended up with just $1,413, or 45% less than if they had just stayed invested. And you can see on the chart, the more of those recovery days you miss, the worse it gets.
So, you might be thinking… if I shouldn’t get out of stocks and park my money somewhere else, what should I do??
Here are a few things to think about:
- Stick to your long-term plan. A good investment plan should assume there are going to be ups and downs along with the way, so don’t let those ups and downs derail you and make it harder to reach your goals.
- Use diversification to lower your risk. Will you give up some of the peaks by diversifying? Yes, you probably will. But you’ll also avoid some of the big drops. And, depending on where you are in life, avoiding the big drops may be more important than trying to catch the peaks.
- Use a cash buffer for income. If you’re relying on an investment account for current income, it’ll help to have an amount allocated to cash or much lower risk securities so that you can ride out the stock market volatility and still take your regular income as planned. Wouldn’t it reduce stress knowing you have the money available to take your income for a year or more regardless of what the market’s doing? For many people, the answer is a resounding yes.
I hope you found this helpful. As always, let us know what you think and what questions you have.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by New England Capital Financial Advisors, LLC [“NECFA”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from NECFA. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. NECFA is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the NECFA’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.newenglandcapital.com. Please Note: NECFA does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to NECFA’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a NECFA client, please contact NECFA, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.