Do you remember early 2016? I sure do. The global stock market dropped approximately 15% from November 2015 to February 2016. During that time, I received several calls from clients expressing concern. Some of these concerns are paraphrased below:
- “I can’t handle seeing my money disappear any further.”
- “Such a sharp drop in the market means worse times are ahead.”
- “Don’t you think we should move to cash?”
- “Let’s move to cash and then get back in when the market bottoms out.”
What I am about to say is eye opening: If you stayed the course and stayed invested, you would be up about 31% cumulatively from February 2016 to September 2017. The other side of the story is an investor that tried to time the market. Let’s assume he moved to cash and got back in when the market recovered in July 2016. He/she would be up about 4%.
Research shows that the more a client tinkers with their portfolio, the worse their performance is. One study by Vanguard of 58,000 of their IRA account holders from 2008 to 2012 found that those who reacted to the crisis had significantly worse performance than those who stayed the course, giving up about 1% a year.
How can you ensure that you won’t succumb to the same fears and anxieties the next time a market drop hits? I recommend planning ahead for what you’ll do during a market drop to help ensure you don’t make any irrational mistakes. Write it out on paper and stick to it.
Market drops and losses are an expected part of investing. Accepting risk is how you earn returns. Your success as an investor depends on how you respond to drops in the market.
We have had quite a run in the stock market over the last 8-9 years. A downturn is inevitable, but we just do not know when that will be. Will you stay disciplined when it comes?