Times of crisis or perceived crisis often demand action. If your house is on fire or you witness a car accident, you really should do something and do it right away. But when it comes to investing, it's often much less clear whether immediate action is required or likely to be in your long-term best interest. Despite this, many investors feel compelled to act when they see alarming headlines or experience volatile markets. Fisher Investments knows stressful circumstances like these can activate our instinctive fight or flight response. Note that both of these options are actions; it is not: Fight or flight or wait and see what happens next.
Deciding to take no action during turbulent markets may be the wisest choice an investor can make. "Doing nothing" can be an active decision, after carefully considering the situation, to stick with your plan. Such inaction can help keep you on track, whilst acting and deviating from your investment plan may prevent you from realizing your long-term goals. Using corrections—short, sudden, sentiment-driven declines of around -10% to 20%—as a case study, Fisher Investments will show how taking action and selling some or all of your investments as a reaction to downside market volatility can be a costly mistake.
Case Study: The Potential Costs of Quick and Decisive Action
Selling out of the market during a correction might feel good. You're taking decisive action and you may get the pleasure of seeing the market continue to fall after you've sold equities. But that pleasure might soon be replaced by regret. Corrections are usually based on psychological factors or false fears and they typically end just as quickly and unpredictably as they began. Fisher Investments believes trying to time corrections can be costly. It is easy to lock in losses if you sell after the correction has started and then buy back in late, missing some of the recovery.
To get a sense of the impact of selling after equities have fallen and then missing out on some of the sharp recovery that usually follows, consider Exhibit 1 which tracks two hypothetical investors during and after the global correction from May 21, 2015 through February 11, 2016. For simplicity, Fisher Investments presumes each individual invested $1 million USD in the MSCI World Index on January 2, 2015. Investor A stayed invested through the entire correction and its aftermath, but Investor B sold stocks on February 11, 2016, the bottom of the correction, when investor panic and fearful headlines became too much to stomach. Shortly thereafter, Investor B reversed course. His or her portfolio was in cash for only a month. But in that month, world markets jumped 11.0% in the correction recovery.[i] Even missing just that gain led to Investor B's portfolio being worth sizably less than Investor A's by 2016's close. Adding to these woes, investor B finished 2016 down, while Investor A was up 6.6% since the beginning of 2015.[ii] This is an extreme example, but it illustrates how trying to time corrections can feel prudent in the moment but can backfire and inadvertently harm your portfolio.
Exhibit 1: Fisher Investments Says Sitting Out is Potentially Costly
Source: FactSet, as of 10/1/2019. MSCI World Index return with net dividends and Bank of America US Treasury Bill (3-Month) Total Return Index, 12/31/2014 – 12/30/2016. 3-month T-bill is used to approximate cash returns. Indexed to $1,000,000 at 12/31/2014. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
How to Stay Strong in Tough Times, according to Fisher Investments
Fisher Investments suggests doing nothing during a correction, while it likely won't feel good in the moment, can be an active decision and one that will likely pay off if you're able to remain disciplined over the long run. During what seems like a crisis, it can be hard to feel like you're just sitting there, while others may be selling out of the market and insisting what a smart move it was to do so. Even some advisors and other experts may be urging investors to make portfolio changes. So what can you do? Ask yourself whether the downturn seems to be primarily caused by deteriorating economic fundamentals or if instead it appears to be driven by sentiment—meaning investor fears. If the downturn is mainly driven by unfounded or overblown fears, Fisher Investments believes deciding not to act and riding out the market volatility is likely best.
Unfortunately, patience and restraint are not easy, especially in the face of tumultuous markets. Our evolutionary history has rewarded our instinct to act quickly under pressure. Capital markets, however, present challenges that are very different from those we dealt with over most of human history. Fortunately, this human instinct need not equal destiny. Fisher Investments suggests a few strategies you can use to cultivate patience and clarity of thought in your investing decisions.
- Think long term. Remind yourself of your long-term goals and what will most likely help you reach those. If you need to grow your portfolio over the long term, stock ownership is likely an important part of your investment plan.
- Mentally prepare for corrections or other downturns. Market volatility is normal.
- Consider whether a recent stock decline reflects negative fundamentals. If it's not or if it's driven more by fear instead, you may not need to worry too much about it.
- Take solace in the long history of capital markets. Corrections are temporary and usually brief and even bear markets eventually end. Historically, markets go up far more often and by a much greater margin than they go down. Owning equities for the long term is one of the best ways to profit from economic growth, innovation and compound interest.
It's not easy, but hopefully these practices can help you focus on the long term and take comfort in equities' exceptional performance history. When it comes to investing, Fisher Investments believes patience and restraint are quite often the most prudent and smartest approach for long-term investors. Next time market volatility strikes, consider restraint—deciding not to act—as an active choice and as one of the most potentially rewarding decisions you can make as an investor over time.
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: FactSet, as of 1/7/2019. MSCI World Index return in US dollars with net dividends, 2/11/2016 – 11/3/2016. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
[ii] Source: FactSet, as of 1/7/2019. MSCI World Index return in US dollars with net dividends, 12/31/2014 – 12/31/2016. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
