IIf you are uncomfortable with the near future of the market, you are not alone. The rebound effort underway since mid-June has been uncertain at best. And this week’s warning from Walmart on its second quarter earnings, as well as IBMThe currency-induced caution could further shake the already shaky stocks. It’s a bad start to the earnings season.
But before bailing out the stocks in an attempt to avoid any new downtrend, wait. As much as the downside risk seems to be ahead of us, there is at least the same risk of missing major upside.
The little things add up
After plunging 24% between the January high and last month’s low, the S&P 500‘S (SNP INDEX: ^ GSPC) The 7% rebound meanwhile feels like a gift: an opportunity to come out with fewer losses than most of us were taking just a few weeks ago. The possibility of further downside also seems palpable, especially considering that summer is usually a slow and bearish time of year for equities. Reignited concerns of a full blown recession only reinforce the bearish case.
There’s a funny quirk you need to understand about the market, though: it’s not always retrospective. Sometimes it is far-sighted, pricing in renewed economic growth that is not always easy to see, or perhaps has not yet materialized. Plus, some of the greatest forward-looking advances take shape when you least expect it. The effort to avoid market setbacks can often leave you out of these moves.
The Hartford mutual fund company has been digging through mountains of data to find some illuminating truths about the market’s biggest daily earnings. Over the past two decades, about half of them have taken shape in the midst of bear markets.
That doesn’t necessarily stop you from suffering setbacks in the days immediately preceding and following those big winners. As no one sees these rallies coming, however, it shows that trying to evade the downside could end up costing you, particularly if you are moving in and out of stocks while down.
And the cost can be higher than you could ever expect.
Numbers crunched by stock speculator Peter Tuchman – a trader on the NYSE floor who is one of the most photographed participants – indicate that between 2000 and 2019, missing the market’s 10 largest daily gains would have cut your annual returns by roughly half that. to simply remain invested during that time. Losing the best 20 days would bring your returns to near zero.
There is an advantage in moving away from the worst daily market performance, of course. Just avoiding the worst 20 days during that 20-year period would have more than doubled your returns simply by buying and holding. Be perfect. And nobody is.
Research conducted by brokerage firm Edward Jones will help you use a “stick” approach and leave it alone. The company found that of the last five transitions from a bear market to a bull market, the S&P 500 has risen by an average of 25% in the first three months following the day the pivot, or low, was reached.
The moral of the story? Stand still, grab your occasional lumps and trust that over time your patience will pay off. If your market timing isn’t absolutely perfect all the time, the odds are still very high against you.
The real danger is getting lost
In response to the stock’s question, it’s safer to keep investing right now than to withdraw your money from the market, but not for the reason you might think. Sticking with stocks is the safest game right now because the real danger is losing gains that no one sees coming.
Trust that time (and not that much time) will take care of your profits, even in the current environment where it seems misery may never end. In the end, it always does.
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James Brumley has no position in any of the titles mentioned. The Motley Fool has positions and recommends Walmart Inc. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.