- Multiple days of stock market losses may tempt investors to sell.
- If you do, you may miss out on the market’s best performance.
- Trying to time the market will probably result in investors actually missing out on very good days, one expert says.
Multiple days of losses may tempt some stock investors to sell and run for cover.
But that is exactly what you should not do.
The reason: Days when stocks suffer big losses are often followed by days when they recoup. If you sell, you may miss the upside — and that will cost you.
“You tend to see down days being followed by very, very strong days,” said Jordan Jackson, global market strategist at J.P. Morgan. “Those strong days are really, really important in terms of weathering the volatile storm.”
On Tuesday, the S&P 500 Index and Dow Jones Industrial Average were poised to attempt to recover from steep sell-offs that led them to have six- and seven-week losing streaks, respectively.
The S&P 500 is down about 15.9% to date in 2022, while the Dow has slid 11.3% thus far this year.
Still, even the biggest swings point to the need to stay the course, according to Jackson.
On April 29, the worst day for the S&P 500, the market was down 3.6% for the day. Then, five days later, you had the best day on May 4, with a market rally of 2.99%.
Moreover, on March 7, the S&P 500 was down about 2.95%. Two days later, on March 9, the index was up 2.57%.
The best and worst days tend to be clustered together, Jackson said.
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“Trying to time the market is likely going to result in you missing out on some really, really good days,” he said.
Staying the course has also proven a more profitable strategy during the pandemic.
Take an investor with $100,000 who sold when the market was down 18% as the onset of Covid-19 began to shock the markets.
If they got back in six months later, they would have just broken even as of last week, according to Jackson. But if they had stayed the course, they would have about $125,000 today.
Admittedly, the recent market drops may be difficult for investors to stomach after last year’s low volatility, where the maximum decline was around 5%.
But normal declines are typically around 14%, Jackson said, which means the turbulence markets are experiencing now is normal.
Investors may also take heart that, from an economic perspective, there are many positives right now, including a strong demand for labor and a low near-term risk of a recession.
But because the outlook for 12 months to 18 months from now is more cloudy, volatility and market sell-offs have picked up, Jackson said.
While it may be tempting to hold more cash in your portfolio, that is not an ideal move as inflation is expected to top 5% this year and 3% next year.
“Cash is going to continue to be a drag on the portfolio when inflation continues to run really high,” Jackson said.