Market and Economic: Market and Economic Insights

Sell! Sell! Sell? Three charts that support staying invested

With the S&P 500’s daily change rarely straying beyond +/-1% in 2017, many market commentators have begun to speculate when volatility will return and what might cause it. While it is true that anything from geopolitics to the weather can spark volatility, investors who have absorbed these warnings may begin to think they can predict when this year’s steady climb will come to an end. Will you be ready for jittery clients fearful of a more volatile 2018?

Volatility makes investors uneasy and understandably so. The urge to respond is powerful, but the optimal response may be a simple one: patience. Though it is easier said than done, showing patience has paid off across multiple time periods.

Short term

The market (as measured by the S&P 500) has finished positive in 21 of the last 25 calendar years, despite a sizable average intra-year decline of 14% (as shown in the Total return by calendar year and intra-year max drawdown graph). In other words, staying patient was beneficial more than 80% of the time. On a calendar-year basis, the odds of timing the market successfully are stacked against a typical investor.

Source: Morningstar Direct and BMO Global Asset Management
Source: Morningstar Direct and BMO Global Asset Management

 

Medium term

Any reflection on the market since the turn of the millennium has to account for the tech bubble and the financial crisis, right? Commentators often highlight the nearly $8 trillion of market value lost in 2008-2009 and its devastating effect on U.S. household wealth, particularly for investors on the cusp of retirement. And yet, those who stayed invested recovered their losses and were profitable again within five years (see Tech bubble and Financial crisis). Even for those nearing retirement, adapting those plans over a three- to five-year timeframe while staying invested would have been a better strategy than locking in losses during the market’s steep decline.

Tech bubble and Financial crisis
Source: Morningstar Direct, BMO Global Asset Management

 

Long term

Markets have given investors a little bit of everything over the past 25 years. However, moving in and out of the market is likely to be costlier than enduring volatility or even large drawdowns. Trying to anticipate the downturns often means forfeiting the upticks. Missing just 10 of the market’s best days over the last 25 years would have cost an investor a full 3% in annualized returns (see S&P 500 annualized returns 1992-2016).

Source: Morningstar Direct and BMO Global Asset Management
Source: Morningstar Direct and BMO Global Asset Management

 

Takeaway

While inertia is not an investment strategy, sometimes patience can be. Even so, an investor’s time horizon remains crucial. Market history illustrates the value of patience, but for some investors this may still require some adaptability. Use this guide to lead a better conversation with your clients about the importance of staying invested.

 

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