Marketwatch: It’s not that stocks can’t fall further. You can bet that patience and resolve will be tested time and again before this bear goes into hibernation.
We haven’t seen the complete capitulation and outright despondency that historically marks a bottom. Not yet. Main Street consumer confidence is at a 40-year low, but Wall Street still has too many optimists. A return to early October’s dramatic lows may change their minds. See related story.But for a longer-term, retirement-focused shareholder — and that’s most of us — selling stocks just because they could fall further not only locks in losses, but also makes it less likely that you’ll participate in powerful market rallies.
Missing those days can be hazardous to your wealth.
“A lot of the recovery tends to occur in the first few months, and if you wait until the all-clear sign to get back in, you’ll have missed out on a lot of the gain,” said Mark Riepe, head of the Schwab centre for Financial Research.
Look at what would have happened if you’d been out of U.S. stocks on the best trading days between January 1998 and December 2007.
The Standard & Poor’s 500 Index returned 5.9% annualized over that time, but had you been sidelined for the decade’s 10 biggest days, the yearly gain would have been just 1.1%, a Schwab study shows. Miss the top 20 days and you’d have suffered a negative 2.6% return; miss the top 40 days and you’d have lost 8.4% annually
Put another way, staying invested through thick and thin would have beaten a poor market-timing effort by more than 14 percentage points a year. Moreover, market recoveries typically start strong. The average return for stocks in the 12 months following the end of a bear market is 45%, but if you sat out the first six months of the rally, that 12-month return becomes just 12%, according to Schwab.
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