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The Risk of NOT Being in the Stock Market

| December 22, 2015
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It can be nerve-wracking watching the news and hearing about the markets “plunging,” “diving,” “free-falling,” and the like. With talk of wars, natural disasters, and corporate accounting scandals many people pull out of the stock market and seek what they feel is more tangible; things like gold, CDs, and savings accounts. This past August was especially scary for many investors as markets fell 11.2% in 8 days. The stock market is much like a roller coaster. With its ups and downs, it can be both thrilling and terrifying. One thing holds true for both amusement park roller coasters and the stock market; no matter how wild the ride, it’s best to stay put and hold on. Many people try to time the market to avoid the bad days but in doing so end up missing out on the good days as well.

Missing the Best Market Days Can Devastate Your Portfolio

For the thirty years from 1985 to 2015, those who have adhered to a “buy and hold” strategy have had average annual total returns of 8.4% with the S&P 500 (a composite of the 500 largest companies, generally regarded as a good representation of the stock market as a whole). Those who missed out on only the 5 best market days during that 30-year span had returns of 6.69%.

That is a 1.71% difference, which may not sound like a lot. However, if you had invested $10,000 into the S&P 500 in 1985 and left it there, you would have $112,429 today. If you had invested the same, but missed the 5 best market days, you would have $69,777. That is a difference of $42,652, or about 38%! Now, if you were really jumpy and missed the 20 best days of the last 30 years, you would have only had returns of 3.84%, earning you $30,970. Missing only 20 days out of 30 years would have cost you $81,459, or 72%!

Clearly it can be devastating to your investments to miss out on the best market days. But how can you make sure not to miss the best days while trying to avoid the bad days? No matter how hard they try, even the most highly educated, experienced financial analysts have no way of knowing what the markets will do on any given day. Those who successfully time the markets are very lucky and very rare. Most people who try to time the markets end up losing big, as we saw with the numbers above. So what is the best way to make money in the stock market?

A Long-Term Approach to Investing

To avoid the kind of mistakes that cause you to miss out on the best market days and your money’s growth potential, you have to take a long-term approach to investing and only invest money that you will not need in the next 5 years. You need to follow a “buy and hold” strategy where you buy in and don’t sell, no matter what the markets do. But it can be hard to stay invested when you are being inundated by negative news and dour predictions. As the saying goes, you need to learn to see the forest through the trees. You need to learn to look past the short-term ups and downs and keep your eyes on the big picture in order to stick with it through the bad days and not miss out on the best days.

The following graph from CNN Money shows the “trees,” the short-term market fluctuations, which are why so many people leave the stock market in a panic and miss out on the best days. This is the S&P 500 from the past 6 months. There are a lot of ups and downs and seemingly terrifying drops.

A wise investor needs to learn to ignore the “trees” and keep her eyes on the “forest,” the historic market returns. The following graph shows the same S&P 500 over the last 115 years, rather than 6 months. It is much more reassuring. The continual upward trend is tangible proof of the strength and dependability (and also short-term volatility) of the markets. Keeping this picture in your mind regardless of the daily headlines will give you peace and confidence when facing the month-to-month ups and downs. You have over 100 years of history on your side.

When the markets get turbulent, it helps to have someone that can help you remember to see the forest through the trees. An experienced financial professional can help you evaluate the markets and make decisions based on knowledge and understanding instead of media hype. If you would like to review your current investment portfolio or have questions regarding the stock market, contact me today at 858.756.0004 or email me at [email protected]

About Deb Sims

Deborah Sims is the Principal of Estate Management Group, a wealth management and financial services firm offering comprehensive and customized strategies to help her clients manage their assets and feel confident in their future. Her mission is to serve as her clients’ most trusted wealth advisor through professional knowledge, integrity, and personalized wealth management services. Based in San Diego, California, Deb’s team has offices in Rancho Santa Fe, Old Town, and Del Mar. She invites you to contact her team today to learn more about how they can help you.

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