No need to embellish anything. Over the past few months, investors have faced some unpleasant events. The S&P 500 has fallen 18% this year. Many other stocks have fallen even deeper since their peak.
Given all the negative factors currently facing the global economy, the sell-off is not over yet. Challenging times can cause even the most seasoned investors to throw in the towel and sell off their portfolios.
However, when investing, it is important to weather turbulent times, and cultivate rational optimism. Today may not be good, but tomorrow may be different. Indeed, perseverance and emotional numbness to market sentiment can be the key to success.
Learn to invest differently from the crowd
Some of you may have several years of experience in investing, and have lived through the financial crisis that turned the world economy upside down. It has shaken your confidence to some extent, and it is quite likely that you have started to panic.
That’s why you may have made some unwise investment decisions when the stock markets started to crash. You started frantically buying stocks just because their price went down sharply.
And as your portfolio fell into the red, you came to the conclusion that you needed to take a break from investing. However, instead of selling off your portfolio, you did nothing. Do you recognize yourself?
Z výše uvedených odstavců si lze odnést několik důležitých investičních lekcí:
- Ignore the share price, focus on the business model: don’t buy a stock just because it’s cheap at the moment, instead focus on stocks that can prosper in the long term.
- Credit is essential: focus on companies that have a solid balance sheet and a positive investment rating, as these factors allow them greater financial flexibility and resilience to weather challenging periods
- Cash is King: Cash flow provides companies with the means to expand when credit is not available.
Maybe some of you said in 2009 that you wanted nothing to do with investing. But crises have made you more experienced and better investors.
These numbers urge you not to give up
Below is an eye-opening table of numbers that may convince you that persistence in investing really pays off. When stocks are falling downwards, it can make an investor consider liquidating to avoid further losses.
Historically, however, some of the best days in the market have come during these periods. Investors who divest too early could lose their future returns:
| Decades | Return of S&P 500 | Return of S&P 500 except 10 best days in decade |
|---|---|---|
| 1930 | 42 % | 79 % |
| 1940 | 35 % | 14 % |
| 1950 | 257 % | 167 % |
| 1960 | 54 % | 14 % |
| 1970 | 17 % | 20 % |
| 1980 | 227 % | 108 % |
| 1990 | 316 % | 186 % |
| 2000 | 24 % | 62 % |
| 2010 | 190 % | 95 % |
| 2020 | 18 % | 33 % |
| Total return since 1930 | 17,715 % | 28 % |
The middle column shows the total return earned by investors over the decades. Over the long term, investors who have kept their money in the market have achieved astounding returns, despite experiencing several bearish trends.
But if an investor were to sell off his portfolio and switch to cash, he would risk missing some of its best days. If they had held out during the ten best days of each decade, they would have achieved much lower returns.
Stay the course
Today’s times are definitely challenging for investors. Don’t give up though, as these should eventually subside. Instead, use this time to reassess your investment strategy so that your portfolio can thrive again when the markets eventually recover.
Matthew DiLallo
The Motley Fool