Investing Is Hard

Investing seems easy when markets rally and are generally calm. But markets don’t just move up or in a single direction. Markets gyrate and create new cycles—with each being different than the one before. It’s during the more tumultuous periods of a market cycle that investing is hard. How investors confront the challenge of downturns determines the outcome and success of portfolio performance over the long run.

As markets recovered from the COVID-19 crisis, investors dove into technology and large-cap growth stocks, so much so that the top-10 holdings of the S&P 500 were mega-cap, technology-related names becoming 30% of the index, and they drove market returns. These stocks and higher-risk areas of the market fell the most during the recent market correction and could now be viewed as being on sale.

Historically, we’ve seen markets rebound after significant downturns. For example, on average, small-cap equities rally by 40.6% over the 12 months following a 20% market decline. These sharp rebounds are not only tied to specific styles and sectors but also to the broader equity markets. Looking at the 20 worst quarterly returns since 1926—which ranged from -14.1% to -37.7%, the subsequent one-year, three-year, and five-year returns averaged 18.6%, 39.8%, and 65.1% respectively. Periods of sharp declines are often followed by some of the strongest returns seen in the market. If investors let emotions drive their decisions, getting them to sit on the sidelines or move out of the market, it could mean missing out on those high-growth periods and giving up potential returns.

Looking at the last 12 bear markets, seven reached the market bottom 46 days after the start of the bear market. In contrast, the longest period from a bear market’s inception to the market bottom was 19 months during the 2000–2002 crash. So, while investing can be challenging for a period, we need to keep the nature of market cycles in mind: up-down-up-down-up cycles.

On average, it’s taken about two years to recover from a decline of over 20%. If we happen to hit the average bear-market loss of -33%, to break even would require a 22% annualized return over two years, a 14% annualized return over three years, or an 11% annualized return over four years. How should an investor interpret this? Investing into market drops, while stomach-churning, can provide some of the greatest value in an investment portfolio over time. Buying into the market during a down cycle allows investors to participate and take advantage of the next up cycle.

When looking at long-term returns, investors need to remember that those returns include the ups and the downs of markets. During bear markets, that means staying disciplined and not making hasty short-term decisions with long-term capital meant to achieve long-term goals. By sticking with your plan and tried-and-true investment strategies, you can avoid the emotional roller coaster that many investors fall prey to and continue working steadily toward your financial objectives.

Source: AssetMark, “On The Mark”
This is for informational purposes only, is not a solicitation, and should not be considered investment, legal, or tax advice. The information in this report has been drawn from sources believed to be reliable, but its accuracy is not guaranteed and is subject to change. Investors seeking more information should contact their financial advisor. Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results.

MD Wealth Partners, Inc.: A personal wealth enhancement boutique for select clients. 805.402.8642. Copyright © Mark Wendell 2022. All rights reserved.