20 Second Advisor: Catching a falling knife (or why you don’t want to sell out in this market).

I often tell people that timing the market is akin to trying to catch a falling knife. You might get lucky and grab the falling knife on the handle. Or you might get unlucky – grab the knife on the blade and end up in the hospital.

In a nutshell, we know that the market has rewarded long term investors! See the first graphic (80x wealth multiplier over 50 years is pretty good!). Prices are lower this year because of worries over inflation, the war in Ukraine, and lower GDP growth/recession fears. In the long run, I trust that individuals and companies will be able to innovate and grow and create the solutions and products of tomorrow. This should mean positive returns for investors over the long haul.

The graphic below shows the historical returns after the market drops 10%, 20%, and 30%. As of now, the S&P 500 has dropped about 25% from its peak in January. While past performance does not indicate future results, markets have historically rebounded strongly after a market correction on average. It may be tempting to “sit on the sidelines” for a bit; however, investors who sit out may end up badly timing when to get back into the market and miss out on the returns created during the recovery. We often say that the anxiety of being “in” the market is quickly replaced by the anxiety of being “out” of the market.

Will you try to catch the falling knife?

Note: I’m going to let the knife hit the ground. Then pick it up by the handle wherever it may land. This ensures that I don’t make a rash decision and end up in the emergency room. I hope you do the same for your portfolio.