What goes up must come down and then usually goes back up again, at least in the case of the U.S. stock market.
The market has been on a roller-coaster ride this year amid the coronavirus pandemic. The S&P 500 started the year strong, breaking the record for the longest-ever bull market. Then, in March, when the pandemic slammed the U.S. with sweeping lockdowns that brought most economic activity to a halt, the index tanked, falling 30% in 22 trading days and officially entering bear territory.
Stocks have since rebounded with surprising strength, climbing to multiple all-time highs even as Covid-19 cases continue to soar. Through Thursday’s close, the S&P 500 has gained more than 13% year to date, and nearly 64% from its March 23 low.
“We have had tremendous support both on the fiscal and the monetary side that have supported markets in the downturn,” said Charlie Ripley, vice president of capital markets at Allianz Investment Management. “It’s sort of supported to perfection.”
Weigh risk vs. reward
For those investing long-term, such as for retirement, staying in the market is often the best strategy, according to financial advisors.
Investors who panicked in March and sold assets may now be kicking themselves after the tremendous recovery the market has seen since. Even though it’s tempting to retreat from the risks of the stock market when things go haywire, it’s important to remember that investing means trading some volatility for the reward of growing wealth.
“Volatility is part of the equation, and that’s kind of what the reward is for,” said certified financial planner Kaya Ladejobi, founder of Earn Into Wealth in New York. “If your capital isn’t at risk, you can’t get those returns.”
Research has shown that missing out on the best trading days has a huge impact on long-term returns, as they often follow the worst days. Using market data going back to 1930, Bank of America found that an investor who missed the S&P 500 index’s best 10 days each decade would have a return of 91% compared to a 14,962% return for those who stayed invested.
“You can weather out the storms as long as you’re not drawing on the portfolio,” said Anjali Jariwala, CFP, CPA and founder of FIT Advisors in Torrance, California. She added that if you withdraw from the market and realize it was a mistake, it can be difficult to find a place to re-enter.
Look for opportunities
A market dip can be nerve-wracking, but it does not signal that it’s time to get out of risk assets. In fact, it can be an opportunity to set yourself up for the next market rally.
“History tells us that markets do recover over time,” said Jason Field, CFP, a financial advisor at Van Leeuwen & Company in Princeton, New Jersey. “When markets do go down, it does provide an opportunity to buy good-quality investments at lower prices.”
Luckily, some investors were able to pick up on this amid the coronavirus pandemic market rout, according to Phuong Luong, CFP and founder of Just Wealth, a San Francisco-based fee-only financial planning firm.
While some of Luong’s clients — who are mostly in their 20s and 30s — reached out in March to see if it was safe to be in the stock market, others asked her if they should be investing more.
“People are understanding better about the value of long-term investing and staying the course and that the risk of being in the market over time decreases,” said Luong.
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Of course, market swings may cause enough anxiety that it becomes clear that an investor has overestimated their risk tolerance and needs to reassess.
If that’s the case, it’s a good time to tweak asset allocations so that the next time there’s a market dip, investors won’t see as much volatility, said Jariwala, adding that on the other hand, they might not see the same returns as an aggressively invested portfolio.
In addition to having an appropriately balanced portfolio for your risk level, having a comprehensive financial plan for unplanned events like the coronavirus pandemic can help ease some anxiety, according to Ladejobi. This includes making sure you have a solid emergency fund as well as a road map for what to do if markets tank.
“When you have a financial plan in place and a strategy you can handle turbulent times better than when you don’t have a plan,” said Ladejobi.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.