October 24, 2019, marked a dubious financial milestone. This was the 90th anniversary of the beginning of what is generally considered to be the greatest stock market crash of all time. Often referred to as “Black Thursday,” this crash ushered in the Great Depression that lasted throughout the 1930s.
Some other major stock market downturns have also occurred during the month of October. These include the Panic of 1907 and the stock market crash of 1987, which saw the Dow Jones Industrial Average fall by more than 22 percent in one day — the largest single-day percentage decline in the Dow ever.
Is Another Crash Near?
While the Dow experienced extreme volatility in early October, falling nearly 1,000 points in just two days, it bounced back fairly quickly and we escaped the month without a historic market crash. However, high levels of economic uncertainty and a feeling that the long-running bull market could be nearing an end have some people fearing that another stock market crash could be coming soon.
During times of economic uncertainty like this, it’s important to put such fears into perspective. The fact is, there have always been doomsayers when it comes to the economy and investment markets and there probably always will be. For example, in 2010 stock market analyst Robert Prechter predicted that the Dow would fall to between 1,000 and 3,000 over the following five to seven years. Instead, the Dow soared, topping 20,000 by early 2017.
And financial author Harry Dent published a book in 2009 titled The Great Depression Ahead. In 2016 he predicted that the Dow would fall by 17,000 points and he’s currently predicting “a major financial crash and global upheaval that will dwarf the 2007-09 recession of the 2000s — and maybe even the Great Depression of the 1930s.”
Maintain a Long-Term Focus
As an investor, what should your response to these kinds of predictions be? If you’re focused on long-term goals like retirement or funding college for your young children, it’s generally best to try to tune out the doomsayers and stay focused on your long-term plan.
Stocks have historically produced higher returns than other types of investments over the long term. For example, the stock market as measured by the S&P 500 Index has averaged a 10.1% annual return over the past 100 years. In comparison, 10-year government bonds have averaged a 5% average annual return over the same time period, and they’re yielding just 1.5% today.
However, many investors get spooked by short-term stock market downturns and sell stocks when the market falls. Then when the market inevitably rises, they jump back into the market again. This results in “buying high and selling low,” which is the exact opposite of a successful investing strategy.
The cost of jumping in and out of the market like this can be high. For example, according to research conducted by Putnam Investments, if an individual invested $10,000 in an S&P 500 Index fund in 2004 and left the money alone, the money would have grown to more than $30,000 by the end of 2018. But if he jumped in and out of the market and as a result missed the market’s 10 best trading days, his money would have grown by just half as much, or about $15,500.
The more our hypothetical investor jumps in and out of the market, the worse his returns get. If he misses the 20 best trading days during this time, his money will grow to just $10,042, or about what he initially invested. If he misses the 30 best trading days, his money will shrink to $6,873, and if he misses the 40 best trading days during this time, his money will shrink to just $4,943.
Keeping Emotions in Check
It’s true that staying invested in the market during times of high volatility can be difficult emotionally. No one enjoys watching the Dow plunge hundreds or even thousands of points in a matter of days. But the reality is that dealing with volatility is part of being a successful long-term investor.
In fact, steep market drops can represent opportunity for regular investors. For example, if you’re practicing dollar-cost averaging by investing a certain amount of money in your retirement plan every month, your funds will buy more shares when the market falls than when it’s rising. This is one way you can actually benefit from market volatility.
Instead of worrying about the latest doomsday economic forecast or big stock market drop, the best course of action for most people is to sit tight and stay focused on their long-term investing plan. As the research indicates, riding out the inevitable ups and downs, instead of jumping in and out of the market, is usually the best way to maximize long-term returns.
Contact our office if you have more questions about market volatility and successful long-term investing.