3 Reasons Not To Sell After a Market Downturn

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Though the stock market is flying high at moment, some investors are still reeling from the steep stock market drop that occurred in January 2016, or the brief mini-crash of the summer of 2015 may still be fresh in everyone’s mind. Less than a year ago, the Brexit vote caused markets to tumble. However, many of the market declines of the last eight years, including the stock market crash of 2008, are becoming faded memories. Certainly, they were hard to go through at the time; but investors who stayed invested throughout that whole period came out of it in more than decent shape. That’s because, after every decline, no matter how severe, investors tend to recover their losses and markets will stabilize and see positive growth. The same can’t be said for investors who sell into market downturns hoping to stem their losses. Here are three reasons not to sell after a market downturn.

Downturns Tend to be Followed by Upturns

In down markets investors are often overcome by their “loss aversion” instincts, thinking that if they don’t sell, they stand to lose more money. However, the decline of the asset’s value is often temporary and will go back up. On the other hand, if the investor sells when the market is down, he or she will realize a loss. A lesson many investors have learned is that even though it can be challenging to watch a declining market – and not pull out – it is worth to sit tight and wait for the upturn after. Research have shown that the average duration of a bear market is less than one-fifth of the average bull market, and while the average decline of a bear market is 28%, the average gain of a bull market is over 128%. The key takeaway is that a bear market is only temporary, and the next bull market erases its declines, which then extends the gains of the previous bull market. The bigger risk for investors is not the next 28% decline in the market, but missing out on the next 100% gain in the market.

You Can’t Time the Market

Timing the market can be incredibly difficult, and investors who engage in market timing invariably miss some of the best days of the market. Historically, six of the ten best days in the market occur within two weeks of the ten worst days. This indicates that if an investor sells during down turns in the market, he or she will likely miss the highest upturns. According to JP Morgan’s Guide to Retirement 2016, an investor with $10,000 in the S&P 500 index who stayed fully invested between January 2, 1996 and December 31, 2015, now has more than $48,000. An investor who missed 10 of the best days in the market each year only has $24,070. A very skittish investor who missed 30 of the best days, has less than what he or she started with – $9,907 to be exact.

It’s Not Part of the Plan

An investor who has a well-conceived, long-term investment strategy should not be overly concerned with the short-term movements of the market. For someone with a 20-year investment time frame, the stock market crash of 2008 or the market downturn after the Brexit vote is likely to have a smaller effect on the long-term performance of his portfolio, compared to someone who sells off during the downturns. What is important to a long-term investor is his own investment goals and a sound investment strategy is based on a well-diversified portfolio with a mix of asset classes that keep volatility in check. To have patience and the discipline to stick with the strategy is highly important to successfully manage a portfolio, and an investor who has conviction in his own long-term investment strategy is far less likely to follow the panicking herd over the cliff.