If you’re investing long-term, sometimes it helps to take a look back and see how far you’ve come. If your portfolio is currently down, it can be easy to forget any progress you may already have made in previous years. If you’ve been investing for a while, your portfolio may have survived market setbacks in the past. Though past performance is no guarantee of future results, of course, the stock market’s long-term direction has historically been up.
With stocks, it’s important to remember that having an investing strategy is only half the battle; the other half is being able to stick to it. A study published in the American Economic Review
(“What Are Stock Investors’ Actual Historical Returns? Evidence from Dollar-Weighted Returns” by Ilia D. Dichev, Volume 97, Issue 1) showed that stock investors who try to time the market typically experience lower returns than quoted historical returns on stocks, which reflect a buy-and-hold approach.
Another study, “Stock Market Extremes and Portfolio Performance 1926-2004” done by the University of Michigan, showed that a handful of months or days have historically accounted for the bulk of both market gains and losses. The return dropped dramatically on a portfolio that was out of the stock market entirely on the 90 best trading days in history. Returns also improved just as dramatically by avoiding the market’s 90 worst days; the problem, of course, is being able to forecast exactly which days those will be.
Even if you’re able to avoid losses by being out of the market, will you know when to get back in? If patience has helped you build a nest egg over the years, it might also be useful now.