Many of the market declines of the last decade, including the stock market crash of 2008, are becoming faded memories for most of us. In the end, investors who endured these difficult times, and stayed invested, came out in perhaps the best shape.
That’s because after every decline, no matter how severe, investors tend to recover their losses and markets tend to stabilize and see positive growth. The same can’t be said for investors who sell during market downturns hoping to stem their losses.
Below are three reasons not to sell after a market downturn.
1. Downturns tend to be followed by upturns
In down markets investors are understandably often overcome by their “loss aversion” instincts, thinking that if they don’t sell, they stand to lose more money. However, the decline of the asset's value is often temporary and will go back up.
On the other hand, if the investor sells when the market is down, he or she will realize a loss. A lesson many investors have learned is that even though it can be challenging to watch a declining market—and not pull out—it is worth it to sit tight and wait for the upturn to come.
Research has shown that the average duration of a bear market is less than one-fifth of the average bull market, and while the average decline of a bear market is 28%, the average gain of a bull market is over 128%.
The important thing to remember is that a bear market is only temporary. The next bull market erases its declines, which then extends the gains of the previous bull market. The bigger risk for investors is not the next 28% decline in the market, but missing out on the next 128% gain in the market.
2. You can’t time the market
Timing the market can be incredibly difficult, and investors who engage in market timing invariably miss some of the best days of the market. Historically, six of the ten best days in the market occur within two weeks of the ten worst days.
According to J.P. Morgan's Asset Management's Guide to Retirement 2019, an investor with $10,000 in the S&P 500 index who stayed fully invested between January 4, 1999, and December 31, 2018, would have about $30,000. An investor who missed 10 of the best days in the market each year would have under $15,000. A very skittish investor who missed 30 of the best days, would have less than what he or she started with—$6,213 to be exact.
3. It’s not part of the plan
For long-term investors, such as someone with a 20-year investment time frame, the stock market crash of 2008, the market downturn after the Brexit referendum in 2016, and other dips and drops in the market are likely to have a smaller effect on the long-term performance of his or her portfolio, compared to someone who sells off during the downturns.
That's because what's important to a long-term investor is his own investment goals and a sound investment strategy based on a well-diversified portfolio with a mix of asset classes to keep volatility in check.
The Bottom Line
Having the patience and discipline to stick with your investment strategy is highly important in successfully managing any portfolio. And if you have a long-term investment strategy, you'll be far less likely to follow the panicking herd over the cliff.