4 Facts To Keep In Mind When The Stock Market Is Down

sunset over the waves

In spite of the frequent pullbacks, 2023 for the most part has been a bullish year for investors as the majority of stocks have been surging higher this year.

However, a prudent investor is always wary of market volatility and always proactively thinking of ways to ensure long term investment success. Here are 4 facts that any investor should keep in mind, no matter how the stock market is performing. 

1. More good days than bad days 

While declines in the market happen from time to time, these declines occur far less frequently as compared to advances. Additionally, market advances are not only more frequent but they are also outsized.

4 Facts To Keep In Mind When The Stock Market Is DownAdvances and declines. Source: Weekly data of S&P 500 Index from Bloomberg. Calculations by Syfe from Jan 1 2006 to Sep 30 2022. Decline(s) are defined as previous peak to trough if fall from peak to trough was 10% or more. Advance(s) are defined from trough to next peak.

2. It pays to stay invested

Missing the best 3 months (in the last ten years) can cut your overall return by a significant percentage. Likewise, missing the best 6 months reduces an investor’s total return to an even larger degree. 

By pulling out of the market, investors could miss a few bad days, but they will also end up missing all the good days that follow. 

As Vanguard’s founder Jack Bogle put it: “it’s about time in the market, rather than timing the market.” Staying invested is the key to long term success. 

3. What are other investors doing?

Despite this year’s tough market conditions, investors have been net buyers of US equity funds so far. 

According to Morningstar research, monthly inflows to US equity funds have been positive for five out of the past eight months. Estimated net inflows have reached about $62.5 billion in the year to date through 31 August 2022.

One likely reason that equity-fund investors have mostly held tight despite the volatility is because many of them are investing for long-term goals such as retirement.

4. What can you do? 

  1. Know your portfolio (strategies, ETFs, funds, and stocks or more) and take the time to check that your portfolio is diversified. 
  2. Stay The Course: Even mistiming is better than not investing. 

Let us demonstrate with a fictional scenario.

‘Lucky’ Larry: Larry has the best timing ever. He deploys $10,000 each year at the lowest point. 

‘Steady’ Stacey: Stacey splits her $10,000 into 12 equal portions. This is also known as dollar-cost averaging (DCA). 

‘Unlucky’ Ursa: Ursa deploys $10,000 at the highest closing level each year.

Larry, Stacey and Ursa invested in an all-equity portfolio that tracks the MSCI World Index fund from January 2012 to September 2022. 

‘Timing’ Timmy: Timmy thinks that he can time the market but ends up not investing and leaves $10,000 in cash thinking that a sell-off is round the corner. We have used 30 day Treasury Bills as a proxy. 

Returns are in AUD, excluding fees, from Jan 2012 to September 2022. These scenarios are inspired by research conducted by Schwab.

Inflow $10,000 each year for 10 years

No surprises that Larry does the best, but perhaps unexpectedly Stacey is not far behind! 

Even Ursa, who has the worst luck possible, made much more than Timmy, who was indecisive and kept his funds in cash. 

No one can be Larry, but we can definitely be more like Stacey, investing consistently over time and staying on course.