Key insights
- The article discusses the recent market sell-off and recovery, emphasizing the importance of long-term investing and avoiding emotional decisions. It highlights the tendency of investors to sell low and miss out on subsequent gains, ultimately hurting their long-term returns. The overall tone suggests a slightly positive outlook for US equities, assuming investors maintain a disciplined approach.
Earlier this year, the S&P 500 (^GSPC +0.26%) fell about 9%, while the Nasdaq-100 dropped 12%. It was the biggest decline for U.S. stocks in about a year and was triggered by the uncertainty over the war in Iran.
For many investors, it was a panic moment. Stock market corrections haven't been that common over the past few years, so the pain of seeing a loss in their investment values was no doubt very real. But while nobody wants to see the value of their accounts go down, how people react to that situation goes a long way in determining whether those short-term losses turn into long-term underperformance.
Investors who saw their investments decline over the past month and decided to get out before they risked further losses likely missed out on the entire rebound in April. In essence, they did the one thing behavioral finance experts tell you not to do: sell low and buy high (if they bought back in at all).
These types of market swings can teach us a lot about why it's important to maintain a long-term perspective and not give in to the temptation to make emotional decisions.
When people talk about long-term buy-and-hold investing, it's not just a platitude. Even in normal times, stocks are volatile. People need to understand that when they go in. They're usually fine with that when prices are going up. When prices go down, however, that's when you find out what a person's real risk tolerance is.
Studies have repeatedly shown that investors usually do damage to long-term returns by trying to time the market or sell when the market is declining. In the latter instance, they usually do the opposite of what they should. They sell low and fail to get back in before prices have already recovered. They're locking in losses while missing out on subsequent gains. And it's a recipe for poor returns.
Here's some of that research in real terms:
The general rule is that if stocks fall by around 5% to 10% due to a geopolitical disruption, they've demonstrated a historical ability to recover pretty quickly. This is because geopolitical events are usually short-term in nature and rebounds can also occur in the short term. If the stock market decline approaches 20% or more, the recovery period is usually longer.