Did you sell in May and go away? So far, it's been a bad trade for long-term investors in the stock market. The S&P 500 has rallied roughly 7% so far this month.
It's true. May to October remains the historically worst six-month stretch for the large-cap stock benchmark (up 1.8%, on average, since 1950, according to LPL Research). It's a reminder for long-term investors that trying to time the market is very tough.
"Market timing rarely works," said Holly Verdeyen, U.S. defined-contribution leader at Mercer, a financial services consulting firm.
Tariff Panic In The Stock Market
Investors who exited the market in early April during the tariff panic, when the S&P was down 19%, learned the hard way the cost of bailing out. If they didn't get back in, they missed the nearly 20% rebound.
Picking the precise time to get out of the stock market and identifying the exact moment to reenter it is as hard as winning the lottery. "It requires two perfect decisions," said Verdeyen.
For long-term investors, such as retirement savers, history shows the folly of jumping in and out of the market. Lowering risk isn't all it's cracked up to be. So-called timers earn lower returns when they try to dodge trouble during periods of market turbulence.
Blame it on clustering, or big market moves coming not long after scary down days. "Markets often rebound in sharp bursts," said Verdeyen.
Volatility Is Normal With The Stock Market
There was a 2% chance of the S&P 500 suffering an up or down day of 3% from the start of 1980 through year-end 2024, according to Vanguard Advisory Research Center. But there was an 80% chance of another 3% move in the 30 days after the first big market move.
The takeaway? The stock market moves too quickly and unpredictably for an investor to time it just right, says Joel Dickson, global head of advice methodology at Vanguard.
There's a good chance that if you get out, you'll miss the market rebound. And you'll shrink your returns and nest egg — which is the primary source of retirement savings for American workers — as a result.
Focus On The Long Term
Missing even a few big up days can be very costly.
Consider this. An investor who invested $100,000 in the S&P 500 at the start of 1988 and held through the end of 2024 would have earned an annual total return of 11.1%. And that means ending with an account balance of $4.9 million, according to Vanguard.
The return, though, would shrink by more than half (52%) to $2.3 million by just missing the 10 best days.
And scaredy-cats who missed the best 30 days in that 36-year period would have given up 82% of their gain and ended up with just $900,000.
Dodging the worst 10 days would result in much larger returns than staying fully invested, according to a recent data set covering more than 40 years by Vanguard and the Independent Vanguard Advisor (IVA). But "could someone actually do this? Not a chance," noted Jeff DeMaso writing in IVA. "Randomness of these days makes the whole exercise pretty futile."
What makes sense is investing for the long haul. Stick to your long-term investment plan in volatile times. Buy and hold mutual funds and ETFs like Wall Street pros recommend.
Here are tips on how to stay in the game and not to let your emotions get the best of you when the market takes a turbulent turn.
Know The Stock Market Goes Up Most Of The Time
Even in the May-through-October period, the S&P 500 finished higher 65.3% of the time, LPL Research data shows. You may earn less in this blah six months than the best six-month stretch from November to April. From November to April, stocks rise 77.3% of the time and gain 7.2%, on average.
But the market is still usually rising from May to October. Getting out means you're hurting yourself by interrupting the compounding of returns.
Focus On Longer Periods
Even if the market is stumbling today, your portfolio may still be in good shape, says Steve Azoury, owner of Azoury Financial.
"I tell clients we had a terrific year last year and the year before was very good, too," said Azoury. "Don't look at the short term, whether it's great or terrible. Look at the longer term. I show them the performance over the past three, five and 10 years. When you look at the longer term, it eliminates that short-term fear."
Target-Date Funds Temper Volatility
Most (92%) of Vanguard's 401(k) plan participants invest in a target-date retirement fund, with an asset mix that matches their risk tolerance. The mix of stocks and bonds is determined by the years left before retirement. And the asset allocation gets more conservative as you age. Any short-term paper losses should be manageable and part of your overall financial plan.
Another benefit of these funds is that your regular automatic contributions prompt you to buy more shares when the market is down and fewer when the market is rising.
"Target-date funds go against the biases that we tend to see when investors are left to their own devices," said Dickson. These funds, which put your investments on autopilot, are designed to keep risk and reward in balance so investors don't feel the itch to liquidate their portfolio when markets tank.
In fact, in the recent market correction in early April, only 2% of Vanguard 401(k) clients who are invested in target-date funds made a financial transaction.
Regular Portfolio Rebalancing Keeps You On Offense
Buying more assets that are losing value with proceeds from the sale of winners forces you to buy low and sell high. Let's say your portfolio targets a mix of 60% stocks and 40% bonds. You can adjust that target allocation every time your portfolio drifts beyond, say, a 5% band, says Dickson.
"The whole idea of rebalancing is to maintain a similar risk profile over time," said Dickson. So, if your stock allocation dips to 55% and bonds rise to 45%, you can get your mix of assets back to its target allocation by selling fixed income and buying stocks to get back to 60/40.
Rebalancing ensures that you buy lagging assets when they are down and selling at cheaper prices, setting yourself up for the eventual rebound.
We can use the S&P 500's recent 19% swoon as an example. If that price correction resulted in your stock allocation deviating beyond the 5% band, you could rebalance immediately and get your stock allocation back to its target allocation.
Many funds and retirement plans offer automatic rebalancing, an investment perk that plan participants should not pass up, Verdeyen says.
Size Up Your Plan's Current Odds Of Success
Often, market downturns are built into a financial plan. That means a price drop might have little or no impact on your ability to achieve your long-term goals laid out in your financial plan.
Don't just focus on the dollar amount decline in your account balance. Instead, check to see if you're still on target to meet your goals, says Dickson.
"Anchor back to your financial plan," said Dickson. "Focus on what the projected success rate (is following a downturn)."
It's common for advisors, for example, to run all sorts of financial scenarios — both bullish and bearish — when building a financial plan. Most plans are built to withstand bouts of market turbulence. It's prudent to check in with your advisor to revisit whether you're still on track.
"Most of the time you don't see any material change in the success rate that somebody is projected to have even if balances are down 15% or so, because those market events have already been built in," said Dickson.
Reexamine Your Risk Tolerance
Financial plans are constructed based on your risk tolerance. But when market downturns strike, you might realize you can't stomach losses like you thought you could.
"The most important body organ for dealing with market volatility is not your brain, it's the stomach," said Dickson. "If you're finding that you just cannot sleep at night or you're all of a sudden checking your account balance every day, that may be a sign that your asset allocation has not been appropriately set for your risk tolerance."
Reduce Anxiety By Putting A Portfolio On Autopilot
New default investments and savings options for retirement plans, such as target-date funds and automatic rebalancing, can go a long way toward helping you avoid the unforced errors that could damage your retirement account.
"All of these things work really well as behavioral buffers," said Dickson.
The benefit of a target-date fund with the right mix of stocks and bonds for one's age is that the magnitude of a portfolio's downside is often far smaller than the investor is hearing about in the news, says Mercer's Verdeyen.
The reason? "The portfolios are more diversified," said Verdeyen. "And they may be in a more conservative allocation than they remember."
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