“Should I Stay or Should I Go?”
This was the title of the 1982 hit by the band The Clash. It is rumored that British musician, Mick Jones, who was one of the Clash’s vocalists and songwriters, wrote this song to express his confusion as to whether he should remain with the band or leave. The song keys on the emotion of whether someone should remain with something or let it go completely.
When the stock market is declining, you may feel the same way about your investment portfolio. Some investors literally lose sleep as they contemplate what to do as the value of their stock portfolio declines.
Their concern may center on whether they should stay in the stock market despite what may seem like daily declines or whether they should sell and place their money in typically less volatile investments like bonds, CDs or money market accounts in an effort to get a better night's sleep.
The challenge in making this decision is that the headlines they read and the state of the overall economy in periods of market declines generally creates concern. The thought of the stock marketing going down further may create many a sleepless night while the decision of how to recover the money lost creates an equal amount of consternation.
“Should I Stay or Should I Go?”
While all bear markets and economic conundrums are different and past performance is never an indication of future results, perhaps what can be implied by past bear markets is that once stocks have suffered a major loss, the general risk may lie in selling your stock investments out of fear. You may find that holding onto them may be a better strategy, particularly when recovering what you have all ready lost is a concern.
The following chart illustrates historic bear markets for the S&P 500.
Dunham & Associates Investment Counsel, Inc.
Column One reflects market peaks prior to the beginning of the bear market and Column Two shows the trough, which is when the market hit bottom.
Column Three indicates the percentage the stock market was down and, equally as important, Column Four shows how long it would have taken you to recover what you lost had you stayed in the market. However, what you might also find of interest is the final column.
Column Five indicates the rate of return you would have needed to recover your losses in the same time as the S&P 500, had you decided to leave the stock market in favor of bonds, CDs, or money market accounts.
As you examine the columns, you will generally find that the yield you would have needed in bonds, CDs or money markets to break even in the same period as by staying in the stock market would have been either difficult to achieve or simply historically not available.
If you use the Financial Crisis of 2007/2008 as an example, you see that the stock market lost 56.78% during this period. You will also see that it took 49 months to recover what you had lost in that bear market.
However, had you sold your stocks at the bottom of that market, you would have needed to earn 23% on your money to achieve the same rate of return as the stock market.
As many of you may recall, long-term bonds were generally below 4% and one year CDs and money market accounts were typically well under 1%.
It is important to note that the chart above does not include dividends that stocks pay and had this information been available for all periods, the time to recovery would be shorter and the return needed on bonds, CDs or money market accounts to break even, would have been higher.
If the market is declining, it could be difficult to remain calm and steady. You might consider seeking the counsel of a financial advisor (we're here to help) and, while there are no guarantees, you may want to remain in the stock market as your best sleep may ultimately come from what had kept you awake.
Disclosures
Investments are subject to risks, including possible loss of principal. Investors should consider the investment objectives, risk factors and expenses of any investment carefully before investing. Diversification does not guarantee profit or ensure against loss.
Information contained in the materials that are included in the Bull & Bear in a CloudSM Marketing Campaign is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information. This document is provided for informational purposes only and should not be construed as individual investment advice.
Securities and investment advisory services offered through FSC Securities Corporation (FSC), member FINRA/SIPC. FSC is separately owned and other entities and/or marketing names, products or services referenced here are independent of FSC. The information presented is from Dunham & Associates Investment Counsel, Inc.