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Why you should hold on to long-term stocks amid rocky times

Volatility can be opportunity in disguise

Hold your nerve when markets are volatile Unsplash
Hold your nerve when markets are unpredictable

Major global events such as the coronavirus pandemic and the Ukraine crisis have prompted investors to flee markets. However, history informs us that this is potentially a bad strategy. 

Here, I explore why it is important to stay invested and why missing out on the best performing days could contribute to the underperformance of your portfolio over both the short and the long term.

After Covid 19 sent shockwaves through financial markets at the start of 2020, the stay-at-home orders and dystopian feel to everyday life may now seem like a distant memory.

More recently, Russia’s invasion of Ukraine rocked the markets once again and now we live amid a world of rising inflation and cost-of-living challenges.

Amid this gloomy backdrop, it might be tempting to leave the markets or cash in to prevent further losses.

Nevertheless, if you want to give your investments the best chance of earning a long-term return, you should practice patience during periods of sharp market declines. In fact, periods of crisis, such as the one we are arguably living through now, often provide the greatest gains.

Volatility is opportunity in disguise and the best time to be opportunistic is when markets are volatile.

Investing consistently can be an emotional roller coaster during periods of market stress, but research consistently shows that it’s the best investment approach in the long run. For example, a study of investors in US equity funds showed that a tendency to discern market timing was a major factor in poor performance.

In the current environment, it is understandable that many are concerned about geopolitical risk, inflation and how it translates into investment value. To put the situation into perspective, the speed at which the market entered “bearish” territory in response to the coronavirus pandemic was the fastest on record.

The temptation to switch to cash is tempting, but data shows that even missing 10 of the market’s best-performing days can have a significant impact on long-term returns.

For example, if you stay “fully invested” through the ups and downs of a market cycle, a $100,000 portfolio will have a final value of $445,000, whereas a portfolio that missed the top 10 days in the last 20 years could end you up with only $250,000.

This also highlights the powerful effect of “compounded returns” over time – for instance, if you miss the best 50 days your long-term returns are actually negative.

One of the most common reasons investors lose money is timing the market – cashing out in an attempt to avoid the stock market’s worst days, and putting it back in when they think the market will recover. Usually though, the stock market’s best and worst days are clustered together. So if you try to miss the lows, you may also miss the highs.

Conversely, missing the best days during a recession and subsequent recovery can have a significant impact on the returns achieved in later periods.

In retrospect, we are fully aware of the global impact of Covid 19 and the speed at which it affected stock markets. During that time, the market was able to keep up with the speed of the virus by pricing in immediate damage. 

By sticking to an established and proven investment framework, you can benefit from short-term volatility while continuing to look for long-term investment opportunities. It is best to avoid behavioural biases that can lead to decisions, which adversely affect long-term return potential.

Granted, the road may not be smooth but in general it’s important to cut through the noise and keep investing even when markets are stressed.

Rupert Connor is a partner at Abacus Financial Consultants