Investing can be a tough journey at times.
Some days, you feel like the market’s wind is at your back. These days, you may feel inclined to sell it all and hide in a bunker until the world feels better. But you still have needs and goals. Your retirement isn’t going to invest for itself, right?
As an investor, you have to learn to balance risk and return. And part of risk may require you to step into the unknown, despite the risk, because your goals require you to.
It’s easy to hit panic mode when things go south.
But the best investors keep calm under pressure. Here’s why:
Panic and relief often go hand-in-hand
Focusing on the day-to-day in wild markets can drive you crazy, even though it’s difficult to pull yourself away from the barrage of headlines. Often, big up and down days tend to cluster together as investors process a wave of emotions, even if the market is in the middle of a recovery. We’re only human, after all. Just this year, the S&P 500 has posted eight one-day gains of 1% or more, even though it’s down 11% year-to-date.
Take the COVID crisis, for example. Remember March 16, 2020? The S&P 500 fell 12%, its worst day since 1987. It was a gut-wrenching drop. But if you sold stocks the day before and bought back three months later, you would’ve missed a 13% rally.
You never know when a selloff is about to turn, so don’t try to time the market.
Panic isn’t as unusual as you think
Markets hit panic mode from time to time, whether it’s sparked by recession, crisis, or warfare. Unfortunately, nobody can predict when the tide will turn, which in itself is enough to make you panic.
Monday’s market drop was frightening, but it was hardly unprecedented. Since 1950, the S&P 500 has gone through 132 one-day drops that large. During most of those drops, it felt like the world was ending. But twelve months later, the S&P 500 was up 82% of the time, with an average return of 20% over that period.
It’s hard to think beyond market moves, especially during drastic drops. When stocks are swinging, focus on the fact that the S&P 500 has taken an average of nine months to recover from drops of 10% or more since 1950.
The end-of-history illusion
Society is in the thick of a humanitarian crisis that could roil global trade. But in the darkest hours, it’s important to remember that this, too, will pass. Cycles of joy and pain have been the heartbeat of the stock market for decades. Humans innovate, businesses adapt, profits rise, shares increase. Then, a crisis hits. We react, we mourn, and then we rebuild.
There’s a scientific reason for why the present (rightfully) feels so painful. It’s called the end-of-history illusion, when people tend to underestimate the magnitude of change and discount their future growth and adaptability.
Take that concept and apply it to the stock market, a call on collective human adaptability. The S&P 500 has grown about 8% per year since 1950. But it wasn’t in a straight line. There have been 33 drops of 10% or more, and 10 drops of 20% or more. Over that time, society has made its way through countless wars, humanitarian crises, financial crises, and even a global pandemic. In fact, we just passed the 13th anniversary of the stock market bottom of the Great Financial Crisis. On March 9, 2009, the S&P 500 had dropped 57% and the financial system was in shambles. Four years later, the US economy was on the mend, and the stock market was back at record highs.
Your brain in panic mode
It’s one thing to look at historical data to calm yourself down. It’s a different struggle to confidently step in and invest in times of crisis. Your brain is telling you to run because the uncertainty is uncomfortable, even if the risk could end up working in your favor.
Sure, your investments may be dropping, but there’s a reason why famed investor Warren Buffett likes to be greedy when others are fearful.
Why? Because markets go up and down, but over time, they’ve mostly gone up.
*Data sourced through Bloomberg. Can be made available upon request.
**Past performance is no guarantee of future results.