Expectations Following Market Selloffs

A common refrain you’ll see us use around here is Keep the Faith! This is perhaps the most important thing we ever tell a client as the most successful investors are able to keep emotion in check and trust their investment strategy, especially when conditions get tough. Study after study shows that market timing is not a successful long-term strategy – try it for yourself – in large part because an investor who times the market has to be right twice.

Still, remaining unemotional in trying times is easier said than done.  The behavior gap between stock returns and the average stock investor exists for a reason.

Back in 2014, we experienced a remarkable period in which the S&P 500 didn’t move by 1% or more for 62 consecutive trading days. So far in 2016, 14 out of the 21 trading days have seen 1%+ moves. All this volatility can be scary, especially when the market sells off 2%+ in a day, as it did 3 times in January, but this daily volatility is immaterial in the big picture.

A one day loss of 1-3% has virtually no effect on future expectations. Bigger losses can signal short-term distress but also better than average long-term potential.  Investors are tempted to pull money right as the market is expected to return the most. Considering just the top-10 trading days accounted for 41% of stocks’ return over the twenty-year ­period from 1993-2013, pulling that money is a dangerous move for the long-term health of a portfolio.

The start to the year has been trying but, as always, keep the faith!