Over decades of investing, Ken Fisher (Trades, Portfolio), our firm’s founder, has observed when markets are highly volatile or down sharply—and when the news paints a bleak picture for the future—investors may wonder whether they should hold onto their stocks or move into cash. Who wouldn’t want to avoid additional losses and also have money ready to invest when the market hits its low and stocks seem “on sale”?
Unfortunately, timing markets correctly and consistently in times like these is difficult at best. As Fisher often notes, such strategies can be risky and potentially costly if you are wrong.
Now, having cash savings may make sense if you plan on using that money relatively soon—for example, saving for a down payment or an emergency fund, should you face unexpected challenges. But if your investments need to last a long time, it may make sense to stay invested in stocks even—perhaps especially—during tumultuous times.
There Will Be No All-Clear Signal
According to Fisher, “It is never absolutely certain whether now is a good time to invest, or if it would be better to wait a few weeks, a few months or even longer.” Markets are uncertain in the short term and investor sentiment can cause substantial and rapid market swings. But in the longer term, markets quite consistently go up. Since 1926, stocks have posted positive returns in 73% of calendar years.[i] Even when there is panic selling, as we saw in February and March of this year, when you look ahead 6 to 18 months, stocks have been usually higher. This doesn’t mean we couldn’t see deeper lows in the short term, but we believe markets will climb again.
But there will likely be no all-clear signal telling you when volatility is over. Market bottoms are often only clear with several months’ hindsight, when you realize that a market uptick is not temporary but is the start of the next bull market.
Fisher Believes “Those Who Wait for Certainty Probably Wait Too Long”
Waiting to invest until you’re sure a recovery is underway comes with potentially high opportunity costs—what you give up by staying out of markets. On one hand, it may mean avoiding more declines, which sounds pretty good if you’ve already watched your portfolio drop 10 to 20% or more. But it also could mean missing out on the next bull market’s steep and fast bounce off the bottom.
While it’s hard to know when exactly the recovery will begin, participating in it is essential to recovering from the bear market. Ken Fisher has termed bull markets’ steep recovery the “V-Bounce,” as Exhibit 1 shows after the 2008 bear market. As painful as that bear market was, a portion of its decline was offset very quickly as markets recovered in the first few weeks of the new bull market. If you missed even the beginning of the “V-Bounce,” you found yourself in a much worse position.
Exhibit 1: The 2009 V-Bounce
Source: FactSet, as of 10/07/2019. S&P 500 Total Return Index Level from 09/01/2008 to 10/31/2010.
This V-shaped pattern of recovery has held across many market cycles—since 1949, bull markets have usually resumed with a bang. Exhibit 2 shows returns over the first 3 months of a new bull market have averaged 17.4%, while returns over the first year have averaged a whopping 39%. Missing out on even part of those returns could be costly to your portfolio and your chances of achieving your long-term goals.
Exhibit 2: The First 3 and 12 Months of a New Bull Market Tend to Be Very Good
Source: FactSet, as of 03/18/2020. S&P 500 daily price returns from 06/01/1932 to 02/19/2020.
Fisher explains, “Market history shows the key to being a successful long-term investor is to remain patient and disciplined during volatility. The biggest risk investors can take is deviating from their plan and thus potentially missing out on market gains.”
Capitalism Has Always Found a Way
While it is never clear exactly when markets will recover or a new bull market will begin, this much is certain: Throughout history, capitalism has proven to be immensely flexible and resilient, pushing markets forward in the long run, enabling their historically high long-term returns.
Over the years, capitalism, innovation and the profit motive have continued to function despite (get ready for a long list):
- financial panics
- market declines
- coups and government changes
- regulatory overhauls
- world wars
- regional conflicts
- social upheaval
- political assassinations
- natural disasters
- monetary and fiscal policy mistakes
- high interest rates
- low interest rates
- currency collapses
- market bubbles
Through all these events, stock markets have kept their long-term upward trend, regularly hitting new record highs. Capitalism continues to provide an incentive for individuals to work hard, develop innovative new technologies, increase productivity and raise their standard of living.
It’s impossible to predict the future, but Ken Fisher (Trades, Portfolio) suggests if you believe in capitalism, then you believe innovations will continue, productivity and standards of living will rise and, in the long run, investing in stocks will continue to give you a higher probability of being wealthier over time than saving your money in cash.
Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.
[i] Source: Global Financial Data, as of 03/26/2020. S&P total return from 01/31/1926 to 02/28/2020.