American investors of all ages have been “treated” to some market events they would rather forget. This week was the anniversary of October 19, 1987, when the S&P500 lost over 22% in one day. Mostly remembered now as “Black Monday,” it remains an annual source of apprehension as October comes around. For somewhat younger investors, their first market shock day was September 11, 2001, when terrorists attacked New York and Washington, D.C. More recently, the March 2020 COVID-19 pandemic caused a major interruption in the market.
While underlying reasons for these events vary, in each case many investors over-reacted, sold perfectly good assets, and lost more money in less time than they ever expected. These unfortunate souls made a tragic mistake – they “did something.” History shows that holding on is generally the most successful technique for lifetime investing. Remember, only long-term money (5-years minimum) should ever be exposed to the market.
Potential errors made by investors are twofold. First, many panic and sell their rapidly declining assets. Secondly, they fail to re-enter the market until the recovery brings the market higher than before the event. In 2020, only 58 days after the COVID-19 “market crash,” the market returned to pre-COVID-19 levels. However, the pandemic marched on, leaving reluctant investors behind as the market attained new highs.
Bad market days and stretches can happen any time of any year, and not always for reasons that are predictable. In 2001, the sudden and negative market reaction was understandable. In 2020, our country was ordered to grind to a halt, and the market reacted similarly. In 1987, only advisors and dedicated investors would have had any clue that equities were dramatically overheated. The later events happened after Internet access was universal.
Economic cycles are more understandable than sudden shocks, and to a degree, investors can make reasonable portfolio changes before and during recessions. However, there are problems with this philosophy as well. The market is forward-looking, and when market professionals see light at the end of the recessionary tunnel, buying begins in earnest. Average investors usually spot the new trend too late to make a positive difference.
Any experienced investor remembers at least one terrible incident, and many have experienced negative outcomes from their own (re)actions. Controlling the urge to “do something” is difficult, and goes against our instincts. Perhaps this is the best reason to work with an experienced financial advisor. Having a trusted and stabilizing advisor will generally result in better long-term returns.
One of the oldest adages in the market says to never make long-term decisions based on short-term events. Resist the panic urge, no matter how gruesome your lingering memories from past market events.
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