Don't Panic When the Market Goes Up and Down

By Dan Timotic, CFA

After 20+ years in this business, it still surprises me how much attention people give to the news reports from day to day when it comes to investing. It also surprises me how much people act on the comments from reporters who have no stake in the outcome of their opinions except for sensationalizing events in order to get more viewership. I think a little perspective is needed to understand that investing is not a day-to-day or month-to-month proposition. Nobody can tell you with certainty what will happen on a daily or monthly basis. However, over longer periods of time, the market has proven to be resilient and has rewarded patient investors. Here’s the reality. Markets go up and markets go down. But how much? For how long? Let’s examine some history and see what really happens with the SP 500 Index over longer periods. (For more from this author, see: Don’t Let the Media Influence Your Investments.)

Looking Back at SP 500 for Perspective

Looking at January 1970 through April 2017 should give us some decent perspective. There are 568 months of returns for us to analyze. During this time, the SP 500 Index experienced 229 negative months and 339 positive months. In other words, about 60% of the months were positive and about 40% of the months were negative. How good and bad were some of these months?

The SP 500 Index provided positive returns of 5% or better in 80 months (about 14% of the time) and lost 5% or worse in 52 months (about 9% of the time). The single best month was October 1974 where the SP 500 Index returned +16.30%, and the single worst month was October 1987 when the SP 500 Index returned -23.08%. The average monthly return (using geometric mean calculation) was only 0.56% during this time. Clearly, the month-to-month fluctuations can be significant. 

That being said, investors who ignored the month-to-month fluctuations and the multiple recessions during this period were well rewarded. Looking at the chart below, the SP 500 Index from December 31, 1969 through April 30, 2017 has increased by 2489.93%. Yes, nearly 2,500%. 

Market Ups and Downs Over 20 Years

I realize looking over a nearly 50-year period may not be realistic for the average investor, so let’s take a look at something a little more reasonable. The chart below shows the performance of the SP 500 Index from December 31, 1996 through April 30, 2017 (nearly 20 years). Keep in mind, this period includes the tech bubble, terrorist attacks on 9/11, the housing crisis of 2008, the government shutdown in 2013, two wars, Brexit, and a host of other events. If you ignored it all and stayed invested, the market rewarded you with a return of 221.87%.

Finally, let’s just assume your timing couldn’t be worse and you started investing in 2008. Yes, you probably felt foolish by the end of the year, but if you maintained perspective, you were rewarded once again. In less than 10 years, from December 31, 2007 through April 30, 2017, the SP 500 Index was up 62.37% even though your first year (2008) included a painful loss of -37%. Unfortunately, I know many people panicked at the end of 2008 and decided enough is enough. Those individuals probably sold everything and sat on the sidelines only to see the market rebound to all-time highs. (For related reading, see: One Thing to Never Do When the Stock Market Goes Down.)

Look, nobody can tell you with certainty what the future holds. We are interconnected throughout the world, and there will continue to be risks everywhere we look. Because of these issues, it is more important than ever to be prudent, patient and disciplined. The markets will go up and the markets will go down. Don’t lose sight of your longer-term objectives just because some talking heads on television are trying to gain viewership.

There are plenty of investment strategies to fit your specific needs and help you achieve your financial goals. If you are working with a qualified investment advisor, you can explore these different strategies and gain better perspective on how these strategies can impact your future needs.

(For more from this author, see: Investing Basics: What You Need to Know.)

Disclaimer: This article is for educational purposes only. Investments involve risk. You should consult a financial professional before investing.

This article was originally published on Investopedia.


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