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Written by: Steve Oniya
“Waiting helps you as an investor and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.” - Charlie Munger
The October and November 2022 market bottom taught classic investing lessons. Despite 2022 being a volatile down-year in some respects, there were positive things to take notice of, whether you were looking or not.
November was a Top 10 gaining month
Despite it all, November was quite a good month. In fact, November had two of the highest 10 moves up for the Nasdaq in the past decade. The Nasdaq, which frequently has high-flying yet volatile technology company stocks, rose 7% on November 10. This was when reports revealed that inflation slowed down more than expected. On November 30th, the Nasdaq shot up again to 4.4% after the Federal Reserve gave potential positive signals about their moves on the economy.
Time in the market vs. market timing
This goes to show how buy and hold strategies like passive investing can help immensely in investments. Bank of America research shows it is difficult to time the market. And worse, if you miss the 10 best days in the market for each decade, your returns are 28% vs. a return of 17, 715%, if you had held. JP Morgan research also shows missing just the 10 best days in a 20-year period reduces your annual return from 6.06% to 2.44%. And if you miss the 20 best days, your returns drop to .08%.
“Though tempting, trying to time the market is a loser’s game. $10,000 continuously invested in the market over the past 20 years grew to more than $48,000. If you missed just the best 30 days, your investment was reduced to $9,900.”- Christopher Davis
Some advantages of holding despite market selloffs are that:
1. You don't miss out on the gains when markets unexpectedly go back up.
2. And, maybe more important, you may never really know when the perfect time is to get back in, - and by then, you may be in too late when market prices are high or going down again.
3. You may be locking in losses when you sell to get out vs. letting unrealized losses potentially stay temporary.
4. One final note is that women are shown through research to frequently be better investors than men. One reason out of many for that, are women's ability to frequently hold longer than men and take less risk. If you already have many of these mindsets, congrats to you!
Staying patient and strategic despite uncertainty
Plenty of research also demonstrates despite all the volatility, the markets' best days are usually after the largest drops. So, it often pays to hold and refrain from impulsive selling. For example, despite 2008 being in the center of the Great Recession, that year had 8 of the 20 best price return days for the S&P 500 since 1998 even up to 2017, according to Morningstar Direct.
Having a plan and not being too impulsive
There are advantages of active investing over passive investing (buy and hold) and sometimes it pays with the right strategies. For example, not buying and holding at times can provide flexibility, potential short-term profits, potential overperformance of benchmarks, autonomy, and tax management, among others. But because of the inherent risks, talk to and work with a professional to make sure you have a plan in place that fits your goals. Lastly, it also helps to have a Certified Financial Planner® professional be there with you to calm your emotions and reemphasize your pre-planned, market-tested, and personalized strategic financial plan during those trying times. So, you can stay at peace when the markets start acting up (as they're supposed to).
“An investment in knowledge pays the best interest." — Benjamin Franklin
Related: Election Year Investing: How To Navigate Market Jitters and Stay Focused
Steve Oniya, CFP®, MBA is a Chief Investment Officer, Certified Financial Planner® professional, and has a Master of Business Administration. You can find out more about him at www.ominvested.com.