If you’re worried about the foreseeable future of the market, you’re not alone. The rebound effort that has been underway since mid-June has been tentative at best. And this week’s warning of walmart on its second quarter results, in addition to IBMthe caution prompted by the currency could further rattle already shaky stocks. It’s an inauspicious start to the earnings season.
But before bailing out stocks in an effort to avoid any further downtrends, wait. As much downside risk as there seems to be ahead, there is at least as much risk of missing out on a major upside.
The little things add up
After tumbling a total of 24% from January’s high to last month’s low, the S&P500it is (^GSPC 1.26%) Meanwhile, a 7% rebound feels like a gift: a chance to walk away with smaller losses than most of us were nursing just a few weeks ago. The possibility of further downside also seems palpable, especially since summer is usually a slow and bearish time of year for stocks. Rekindled concerns of a full-blown recession only reinforce the bearish scenario.
There’s a fun quirk you need to understand about the market, though: it’s not always backward looking. Sometimes it’s forward-thinking, gauging renewed economic growth that isn’t always easy to see, or may not even have materialized yet. And more than that, some of the biggest cutting-edge payoffs take shape when you least expect them. The effort to avoid market setbacks can often exclude you from these moves.
Mutual fund company Hartford dug through mountains of data to find some eye-opening truths about the market’s biggest daily gains. Over the past two decades, about half of them have taken shape in the midst of bear markets.
This doesn’t necessarily prevent you from experiencing setbacks in the days immediately preceding and following these big winners. However, given that no one sees these rallies coming, it goes to show that trying to avoid the decline could end up costing you dearly, especially if you jump in and out of declining stocks.
And the cost may be higher than expected.
Figures analyzed by stock speculator Peter Tuchman – a trader on the NYSE floor who is one of its most photographed participants – indicate that between 2000 and 2019, missing out on the market’s 10 biggest daily gains would have reduced your annual returns of about half compared to simply staying invested for that time. Missing out on the best 20 days would bring your returns to almost zero.
There is of course an advantage in avoiding the worst daily performance in the market. Simply avoiding the worst 20 days in that 20 year period would have more than doubled your returns from simply buying and holding. Again, if you want to capture all of this advantage while avoiding major downside market moves, your timing has to be perfect. And no one is.
The research done by the Edward Jones brokerage firm will help you take a do-nothing approach. The company found that over the last five transitions from a bear market to a bull market, the S&P 500 rose an average of 25% in the first three months from the day the pivot, or trough, was hit.
The moral of the story? Hold on tight, take your occasional bump, and trust that in time your patience will pay off. If your market timing isn’t absolutely perfect all the time, the odds are still stacked against you.
The real danger is to miss
In answer to the title question, it’s safer to keep investing now than to take your money out of the market, but not for the reason you might think. Sticking to stocks is the safest game right now, because the real danger is missing out on gains no one sees coming.
Trust that time (and not even that much time) will take care of your bottom line, even in today’s environment where it seems like the misery might never end. Ultimately, it always is.
James Brumley has no position in any of the stocks mentioned. The Motley Fool has posts and recommends Walmart Inc. The Motley Fool has a Disclosure Policy.