Resist the Temptation to Overreact – Consider Sticking to Your Investment Plan
During times of market stress, it can be difficult and even seem counterintuitive to minimize portfolio actions, but that is often the best course of action. Faced with a volatile or down market, you may become wary or try to cap losses by selling all of your investments.
Unfortunately, this decision also requires a decision to reenter “when the markets have calmed down” or permanently exit the markets. If you miss just a few of the top performing days, it can significantly reduce your portfolio’s returns over time. Market timing is unpredictable- sometimes the best performing days occur in what appears to be a “big selloff.”
$100,000 investment in the S&P500
Adjusted for Missing “Best Days” (1/1/96-12/31/15)
For the investor who stayed the course, their annualized return for the 20 year period was 8.2% while the investor who missed the top five days would have only gained 6% on an annual basis. In dollar terms, that would have meant $162,403 of opportunity cost and a terminal value 34% below that of a “stay the course” investor. Consider sticking with a prudent investment plan.
