Markets all over the world have been getting rocked, and it would be easy for investors to hit the panic button and sell their stocks.
Big mistake, say the veterans.
Last time this sort of a correction happened in August, Brian Belski of BMO Capital Markets reminded his clients in a note to stick with their investments through market corrections.
“We believe investors who are trying to time entry and exit points in anticipation of a potential market correction are taking the wrong approach,” Belski said. “We have always subscribed to the simple notion of sticking with your investment discipline and taking the good with the bad since the hard data suggests it is very difficult to successfully time the market over long periods.”
A correction occurs when the market falls by 10% from a recent high. That’s where we are now.
Trying to figure out the sharp moves in the market ends up getting investors in trouble and jumping out of the market when the going gets tough can lead to missed opportunities. Here’s Belski and Roccanova:
“We believe most investors have a tendency to sell into the weakness and then wait too long to get back in after the market recovers. And there have been plenty of studies that show the negative consequences of missing just a few good days for investment performance — meaning even the slightest misjudgment could have huge portfolio performance implications.”
In fact, based on a chart in Belski and Roccanova’s note, returns after corrections like we’re experiencing are pretty good, with an average 19.9% growth in the S&P 500 over the following 6 months and 31.4% over the next 12 months.
Additionally, panic selling can cost you. Bank of America Merrill Lynch’s Savita Subramanian found that investors that sold off after a 2% drop and bought back in 20 days later underperform the overall market big time.
It may pay to just stay calm.