Financial Implications of Selling During a Market Correction
Being quarantined and spending a lot of time at home has had a profound effect on our day-to-day lives. While it allows us to catch up on all the Netflix shows we’ve been missing, it also gives investors plenty of time to worry about their investments.
Worry is a normal reaction during times of market declines and economic uncertainty, but investor anxiety is often intensified by the media’s tendency to sensationalize negative news.
In reality, no one knows when the fallout from COVID-19 will end, how long the economic impact will last, or when the markets will hit bottom. However, I think we can all agree that we will get past this. If you believe otherwise, then there’s no point to staying invested, is there?
According to a JP Morgan Asset Management study of past market corrections and recoveries, on average, returns during market corrections are -42% and last 22 months. On the other hand, average returns during subsequent recoveries are 166% and last 54 months.
The implications are clear: investors who panic and sell during corrections also miss out on sharp market recoveries and end up with lower ending balances. If you’d missed just 10 of the best days in the stock market over the last 20 years, your annual return would have dropped from 6.06% to 2.44%. Moreover, six of the best 10 days occurred within two weeks of the 10 worst days.* If you believe you’re lucky enough to time the market both on the way down and on the way up, then you might as well go play the lottery.
It is not an easy feeling for anyone to watch their portfolio drop significantly in value. However, during such times, we highly recommend that clients remain focused on long-term goals and refrain from checking their portfolio values daily.
It’s also a good time to reassess your investment goals and risk tolerance with your financial advisor. After all, it’s been 11 years since we’ve experienced a recession, and most of us have forgotten what it feels like to see our portfolios drop by over 20%.
*Source: JP Morgan Asset Management – Guide to Retirement 2020