5 years ago this week...
5 years ago, the Covid-19 pandemic began to unravel the U.S. markets.
On February 19th, 2020, the S&P 500 hit a record high of 3386.1 before losing 33.9% of its value over the next month. It hit its Covid trough of 2237.4 on March 23rd.
What would have happened if you invested in the S&P 500 index right before its high on February 19th? You would be up 81% today.
When you sell out of the stock market during a downturn and wait for things to “normalize”, you have now created two hard decisions for yourself: when to sell out of the market, and when to reenter it. Correctly timing both of those decisions is nearly impossible.
Mistiming your decision to reenter that market by even a day can have a significant impact on your returns. Long-term market returns can be heavily driven by just a small number of single day market rallies. Staying invested and not missing those days is extremely important.
Missing just the best 10 days cuts your annualized return down from 9.8% to 5.6%. Missing the best 30 days results in an annualized return of 0.8%. And missing more best days than that results in negative returns.
Another challenge investors face during market downturns is our perception of time. When we were in the thick of it, Covid felt like it lasted forever. You may even still notice residual effects if it today. But the Covid bear stock market technically only lasted for 1 month. Even with the 34% drop, the S&P 500 finished 2020 with a total return of 18.4%.
You can see from the chart that bull markets have lasted longer and have had greater magnitude than bear markets. However, the bear markets are much more painful and memorable. This skews our perception of how long and how bad the bear markets actually were. We believe it is important to "zoom out" on the timeline and look back at history.
The following chart shows the Dow Jones along with major global events since 1900.
Zooming in on any singular point in the timeline may tell a story of volatility and negativity. Zooming out to the full timeline tells a story of the market's resilience over time.
Investors tend to exhibit a behavior called myopia where they are more focused on short-term results than the long-term. The most recent events are the freshest in our brains and most likely to influence our behaviors. This can result in making emotionally driven decisions during bear markets.
Some people compare investing in the stock market to gambling at a casino where the house always wins. We believe that is a major misconception. You will be hard pressed to find a casino with odds that you will win 54% of the time in a day or 79% of the time over a whole year.
In the stock market, the house doesn't win. The disciplined long-term investor does.
We thank you all for taking the time and reading “Market Watch.” It is meant as an educational piece on the always evolving markets. It is something we plan on providing every month, and your feedback is very important to us.
On a personal note, RMH is in the position to bring on new clients so please be sure to share this informational letter with whomever you wish. RMH’s focus is on the customizable investment needs of individuals, families, and foundations. We enjoy working with our clients to better understand their goals, values, and passions for what is important in their lives. In expanding our client base, we look forward to working with people who share these same desires.
Ashlyn Tucker, M. Fin, Analyst, CFA Level III Candidate
Richard Mundinger, CFA