Don't Just Do Something; Sit There

Jeffrey Murphy

May 04, 2022

Investment markets? You’ve likely heard that they continue to challenge us and we want to keep you informed.

Russia’s war on Ukraine has not waned. Reopening from the pandemic shutdown is still dealing with some supply chain snags and, more prominently in some areas, the struggle with rebuilding a productive workforce. As I write this, the NASDAQ (tech heavy index) is down nearly 22% from where it started this year. The Vanguard Balanced Indexed Fund (a proxy for a 60/40 stock/bond allocation) is down 11%. And in the first quarter of this year, the aggregate bond index is down almost 9% - just behind the Dow Jones Industrial Average. Bonds ended March with their worst single-quarter performance in almost four decades.

As you can see, it doesn't matter whether you're an aggressive investor, moderate, or conservative investor, the first quarter was difficult to make money.

Let’s remember - this too shall pass. See the attached chart from Bank of America showing the markets after their worst starts since 1942 and indicating a comeback could be due. Today, the S&P 500 is down 13.3% year-to-date. However, as B of A illustrates, five out of the six worst early-year market selloffs are followed by recovery to a double-digit upside by the end of the year.

It’s easy to contemplate getting out of the stock market with intentions of stopping the bleeding. But we know that is the number one mistake individual investors make - buying high and selling low. While past performance doesn’t promise future results, historically, markets move much higher over rolling three-year periods… going all the way back to 1988, at almost an 11% clip. Just being out of the market and missing the five best days, investor returns fell to only 4%, which is less than bonds appreciated during that same timeframe. Additionally, just this year, while the return on the S&P 500 in the first quarter was down almost 5%, if you had missed the five best days, you would have been down 15%. Conversely, if you had miraculously missed the five worst days, you would have ended the first quarter up 7%...and I don't know anybody who can time the market that successfully. This is illustrated on the second attachment.

Whenever we look at the markets, there will always be reasons not to invest at that time. This is why for so many people, except for day-traders, remaining invested and periodically reviewing and rebalancing accounts is the best thing to do. Actually, putting in new money - particularly through dollar cost averaging for larger sums - is a very smart way to take advantage of the situation and buy low.

The stock market has historically rewarded patience in a diversified portfolio. We think it is not different this time.