One month into the year and the stock market has pivoted dramatically from where it was trending in the last quarter of 2018. On Christmas Eve, the S&P 500 Index bottomed, dropping nearly 20% from its highs that were set at the beginning of October. A sharp decline that came in a rather short period of time. Christmas day (the stock market is closed) could not have come at a better time. Since the stock market opened on December 26th, the S&P 500 Index has climbed (nearly straight up) just under 10%, helping post a 2019 year-to-date gain on January 31, 2019 of just under 8%. Quite the volatility!
Was it systematic program trading, year-end tax loss selling, or the Federal Reserve’s commentary that drove this explosive decline? And on the flip side, was it a change to a more dovish tone by the Federal Reserve or investors adding back to their portfolios that has caused the subsequent up move? Quite frankly, it doesn’t make a huge difference what the reason. Investors (as a whole) got skittish and then got excited… all within a matter of a few months. As long-term investors, we sit on the sidelines and shake our heads and then we take advantage of the buying opportunities presented (if any).
Maybe more importantly, this somewhat extreme volatility is a learning opportunity. Somewhere within this recent period it is reasonable to think an individual could be driven to make investment decisions based on emotions… essentially selling because of fear. Even if you timed things correctly (i.e., sold before the correction), would you have gotten back in before the subsequent rise? Most likely, no. Even worse, you might have missed the best up days.
Imagine if this was your investment approach (i.e., you were a market timer)? And this is the way you always invest? Not necessarily selling at the wrong time, but more damaging, not being invested for the good times? Look no further than this chart to the right.
Over nearly three decades, if you missed the 25 best days for the stock market (i.e., were not invested), your returns would mimic those of the U.S. 5-Year Treasury. One dollar invested in 1990 would be worth less than $4. Staying invested and participating in those 25 best days would have rewarded you with your dollar growing to nearly $14. Quite a difference! Long story short… if you are going to invest in the stock market, be sure to have a long-term investment approach you can commit to and believe in. You cannot time the market and trying will only cause you pain (and more importantly, lost gains).