Hold On, Don’t Overreact: The Smart Way to Invest

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The first three quarters of 2018 saw the stock market reach historic peaks. The S&P 500 hit an all-time high and we experienced the longest bull market in history. For over nine years, the market did not experience a fall of 20% or more.  Then, in the last quarter of 2018, the S&P 500 fell 10%. Now one month in to 2019, the stock market is already regaining ground it lost in December. Does this mean you should make drastic changes to your portfolio to react to all this change? Not necessarily.

The below chart compares the returns of 43 various asset classes against that of the average investor, annualized over 20 years. The average investor only outperformed three out of 43 asset classes. The average investor even performed worse than cash, labeled here as a 3-Month T-Bill. The reason the average investor has done so poorly in this analysis is because it is impossible to predict the market and unwise to react to its inevitable fluctuations. In an ever-changing market, investors are too often provoked by volatility to act when they shouldn’t, thus unintentionally buy high and sell low. Instead we can learn from this analysis that by not trying to time the market, and instead holding or routinely buying regardless of market fluctuations, an investor probably would have done better.

asset class returns vs. the average investor 20 years annualized

Holding over a long period of time, rather than frequently selling and buying, has historically been a good move. Past returns do not guarantee future results, but the analysis shows that in general it is better to make an educated choice and stick with it. It is important to monitor your holdings, but do not be swayed by emotion to buy or sell out of fear or impatience.

The market will fluctuate, but don’t let that scare you. If you plan to hold investments for a long period of time, you will most likely benefit in the long run. Read my post about a 401(k) and saving retirement.

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