Personal Finance

You want to give up on the stock market. Here's why you shouldn't

Key Points
  • The last couple of months have been brutal for investors.
  • And we're told there's no end in sight for this global health crisis. 
  • Yet if investors can't tolerate the losses, they'll also miss out on the gains.
White flag blowing in the wind
Derek Brumby

After weeks of steep market declines, you may feel you've had enough, that you want your hard-earned money during these uncertain times with you, under quarantine. And who could blame you?

Headlines warn us that we're careening toward a global financial crisis uglier than 2008, and the stock market has seen some of its worst days in history recently, as a new virus rips across the world and paralyzes economies. The last couple of months have been brutal for investors, particularly those nearing retirement or another deadline like sending a child to college or coming up with a down-payment on a house.

Let's say you had a $1 million portfolio, split between U.S. stocks (70%) and bonds (30%), on Jan. 1 of this year, at which point news of the coronavirus was just starting to trickle out of China. By Monday, March 23, your savings would be down to about $780,000.

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Worse yet, we're told there's no end in sight for this global health crisis. 

Despite the unprecedented times, though, some things never change: If investors can't tolerate the losses, they'll also miss out on the gains. "Pain is a sign you're investing well," said Allan Roth, founder of financial advisory firm Wealth Logic in Colorado Springs, Colorado.

Let's return to that $1 million portfolio beaten down to $780,000.

If you'd capitulated – in investing terms, cut your losses and moved to cash – on Monday, when it hit that low, you'd have missed the massive gains the market saw the very next day, on Tuesday, March 24. That day, the Dow Jones Industrial Average had its biggest one-day spike since 1933.

And that portfolio, as a result, was back up to more than $830,000. (These calculations were provided to CNBC by Morningstar.) 

Pain is a sign you're investing well.
Allan Roth
founder of Wealth Logic

"Recoveries can come in fits and starts," said Rob Williams, vice president of financial planning at Charles Schwab, adding that investors have been moving to cash and other defensive assets like bonds as of late. "For longer-term investors, we suggest staying the course if they can." 

Williams provided some data to prove his point: Over the last 20 or so years, the S&P 500 produced an average annual return of around 6%. But if you missed the best 20 days in the market over that time span, by, for example, capitulating in declines, and then reinvesting later, your average annual return would shrivel to 0.1%. 

If it's any consolation during these trying times, most trials are finite. Even aggressive, stock-heavy portfolios took just around two years to fully recover from the last financial crisis, Charles Schwab found. 

It can feel impossible to imagine a different reality than the one we're engulfed in. Yet we've been hit with disasters and devastation before, and the market has always bounced back. Why give up on it now? 

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