Why is it Important to Keep Your Portfolio Invested?
Time, not timing, is what matters the most in investing. In a perfect world, investors would invest in the market during the lows and reduce their positions during the highs. The problem is that nobody can pinpoint when these peaks and valleys occur. Therefore, we advise clients to systematically contribute to their retirement accounts for many years (dollar-cost averaging), accurately assess their appetite for risk, review their time horizon regularly, and make sure there is a logical framework around their financial plans. This allows the clients to worry less about the day-to-day volatility or newsworthy events, and more about what is important in their lives and the reasons they want their money to grow.
Warren Buffett always says that he likes his stocks the way he likes his socks: on sale! It is a funny thing that in the stock market people want more of something when the price goes up, and they want less of it when the price goes down. This concept was displayed recently with the GameStop stock surge. The higher the price went, the more enticing it was for certain investors to purchase the stock for fear of missing out, regardless of fundamentals. Human nature usually leads investors to do the opposite of what they should be doing to build long-term wealth. Another Buffett quote is “be greedy when others are fearful and be fearful when others are greedy.”
One of the few constants in the market is volatility. Prices are going to move around, and what we observe is that prices often move around more than fundamentals and corporate profits. There will be volatile periods where market prices fall significantly, and maybe even residential property prices decline, causing investors to get nervous. People feel the pain of losses more than they enjoy the pleasure of gains. We try to instill in our clients not to get too high during the good times, nor too low during the bad times. Our research shows that those who sell out at the bottom and then buy back in, say a year later when they feel more comfortable, do much worse than those who remain invested.
J.P. Morgan Asset Management analyzed the impact of missing days in the stock market. If you invested $10,000 into the S&P 500 on Jan. 3, 2000 and left it completely invested until Dec. 31, 2019, you would have received an average annual return of just over 6%. Your $10,000 would have grown to $32,421. This 20-year period includes roughly 5,000 days during which the stock market was open. Missing just the 10 best days out of those 5,000 would have resulted in less than half as much money. Missing the best 20 days would have caused the investor to basically break even over the entire 20 years, and you would have lost money by missing any more than 20 of the best days over this time period.
In summary, it is so important to keep your portfolio properly allocated, monitor your financial plan for upcoming withdrawal needs, and keep calm to avoid the temptation to pull out of the market during volatile times!