While it might seem counterintuitive to sit back and relax while stocks post swift and steep losses, for investors with longer-term time frames it typically pays to wait it out.
Looking at data going back to 1930, Bank of America found that if an investor missed the S&P 500′s 10 best days in each decade, total returns would be just 91%, strikingly below the 14,962% return for investors who held steady throughout the ups and downs.
The firm noted this eye-popping statistic while urging investors to “avoid panic selling,” pointing out that “the best days generally follow the worst days for stocks.”
It’s nearly impossible to time your investing so that you get out at the right time and then get back in at the exact right time to profit from big comeback rallies.
As more and more Street strategists and high-profile investors say a recession is largely unavoidable at this point, investors are offloading equities, preferring not to wait around for what could be additional losses.
But this strategy is precisely the opposite of what many say to do during times of volatility.
“It’s an incredibly bad time for people who don’t have to sell to be selling, because they are selling into an avalanche,” said David Bahnsen, chief investment officer at The Bahnsen Group, which oversees $2.25 billion.
Experts typically advise retail investors to avoid the impulse to time the market, which can be difficult even for professional traders.
Bank of America said that trading over a one-day period is “only marginally better than a coin-flip,” while noting that “the probability of losing money plummets to 0% over a 20-year time horizon.”
Still, retail investors like to try their hand, which can not only lock in losses, but also put them at risk of missing the best days.
Goldman Sachs found that “households,” which they define as retail investors as well as some professionals such as hedge funds, are the only subset of shareholders that have “sold equities during each bear market since 1950.”
This is essentially the opposite of the “buy low, sell high” goal of investing. Time and again, bear markets have proven to be good buying opportunities — it can just take several years for the gains to be realized.
For those who can shoulder the added risk, it pays to stay invested.
“Investors with longer-term investment horizons should remain invested in stocks,” Goldman said, while Bank of America noted that “time is money for equities.” The firm added that “for equity investors, the best recipe for loss avoidance is time: as time horizons lengthen, the probability of losing money in stocks has decreased.”
Wall Street firms are cutting their growth forecasts for the first and second quarter of 2020, warning about the impact on GDP as the coronavirus-related slowdown rages on. But at this point many still see a recovery in the second half of the year.
And in the meantime, there are a number of ways investors can take advantage of the sell-off in equities, even as the long-term impact of the virus remains unknown.
“Given the expected pressure on company profits, the spotlight is now on balance sheets,” Citi equity strategist Robert Buckland said in a note to clients Friday. “This is especially relevant for income investors who are tempted by high yielding stocks but want to avoid dividend cutters,” he added. The firm is overweight the typically defensive utilities sector.
Bernstein also said to focus on companies with quality balance sheets and sustainable dividend yields, as well as U.S.-based companies that offer sustained growth potential. The firm highlighted names like Nike and Microsoft, which it believes checks these three boxes.
Junior Trader Radi Djuma