It is one thing to write about a particular concept like the potentially huge cost of missing up days in the market by trying to time it and / or selling long-term holdings based on short-term fears, but it is another entirely to experience something firsthand. With the latter, the lesson becomes more real - and hopefully sticks.
In this case, we recently wrote about how returns plummet when just a handful of up days are missed in the market. The typical response is, ‘…well if I miss the down days, then it all evens out, right?’
No.
The scenario that takes place 95%+ of the time is that investors sell stocks after they have already gone down, so the down days have already been experienced. The only thing that is missing – or that the investor is at risk of missing – are the up days to follow (of course stocks can go from being down 15% to being down 25%, but by the time someone sells in a panic, most of the damage has already been done, and it is the rebound they are at risk of missing – a potentially very costly mistake).
If the conversation were about taking profits off the table after large run-ups, then in essence that is the opposite of what typically occurs.
In this case, the market dropped nearly 20% early to mid-April, many investors rushing for the exit thinking ‘…this time is different, the end of the world as we know it is here…’ and within weeks (not months, not years…weeks), the market had regained virtually all of its losses. Many investors are buying stocks back 20%+ higher than where they sold them only weeks ago.
As I quoted Buffett, the stock market is a device for transferring wealth from the impatient to the patient.
Bottom line, develop a financial/investing plan, set aside in short-term fixed income money you may need for the next couple years, that way when – not if – stocks crack for whatever reason, you won’t be the one selling in a panic and regretting soon thereafter you did not have the patience to wait for the rebound (which has happened 100% of the time there has been a correction or bear market – it is just a matter of duration).
This brings us to topic number 2 that I recently discussed, namely how relative perspective can have a big impact on how we perceive things and the actions we take accordingly.
I have used the example that if the market goes up steadily 15% in a year, then no one thinks anything of it, but if it goes up 25% and then plummets 10%, people’s perception of how we got to 15% up on the year will be dramatically different, even though the outcome is exactly the same.
In terms of what is going on now (putting politics aside), the administration threatened/leveled massive tariffs on various countries including China. Let’s use the 145% China tariff the administration imposed. This was part of why the markets dropped so violently in early April. But as soon as there was a whiff that the actual tariff might be lower, the markets rebounded hard. Even if the modified tariffs were/are higher than they were originally (before the trade war escalation in early April), the relatively lower tariffs than the 145% indicated seemed great by comparison.
It is all relative. Like being number 100 and last in an airport security line. When 50 people show up behind you, it ‘feels’ better because relatively speaking you are better off (you could be #150 in line), even if nothing has fundamentally changed.
Take away: in the near term, relative perception can move the needle, but do not be blinded to absolute numbers (assessing the starting point to the new outcome, not solely the new outcome relative to the initial extreme change). Absolutes and fundamentals ultimately matter over time (applied to virtually anything in life, not just the stock market), even if short-term changes in sentiment can drive near-term price movements in stocks.