The difficulty and rewards of staying the course

Over the years, we’ve repeated on numerous occasions “that time in the stock market is more important than timing the stock market.” One works; the other rarely does.
 

The market's rapid rise over the past ten years has many market observers calling for a bear market, a correction, or X number of years of sideways growth.  Other prognosticators believe this is a new era and that artificial intelligence will make companies more profitable, thus lifting stock prices. Like most other predictions, the truth is likely somewhere in between the two extremes. Imagine, however, if you could do well, regardless of which prediction came true. 
 

If we turn the clocks back to 1996, how likely is it that you would have stayed invested in the stock market if you knew that the next 25 - 30 years would bring a global pandemic, five bear markets (with drops in the S&P 500 ranging from -20% to -55%), irrational exuberance, bubbles, and a lost decade? If we predicted all those events would occur, but the S&P 500 would still grow by an average of 10% per year, would you have believed us? Surprise, surprise, it happened.  
 

The authors of the article¹ “The difficulty and rewards of staying the course” aptly note that short-term actions can work against long-term objectives, but there are ways to overcome significant market events. The key takeaways from their paper:

• “Don’t let headlines and short-term performance scare you out of the market: Regardless of whether the past one, two, or four quarters have been positive or negative, between 60% and 80% of the time, the next one, two, or four quarters had positive results. Said differently, making investment decisions based solely on fear caused by recent performance can be risky, as the outcome is not likely to be in your favor.”
• “Always be prepared for volatility: When an eventual bear market does occur, it’s reasonable to expect extreme two-way volatility (for example, strong positive and negative returns).”
• “Know the power of having a plan and sticking to it: A financial plan that is well-balanced; aligned with…your time horizon, investment goals, and risk tolerances, and strategically followed and rebalanced, is extremely challenging during market sell-offs, even for the most experienced investors and advisors.” By moving to the sidelines during volatility, it’s likely an investor will be out of the market during some of its best days, potentially resulting in a long-term negative impact to his/her portfolio.
• “Strategic asset allocation has historically worked, if you stayed invested.” The risk of missing financial objectives is significantly higher by trying to time markets. Rebalancing plays a critical role in helping to achieve long-term goals. Buying equities when markets are down, and selling equities when markets move higher, results in less volatility over time. More importantly, rebalancing can help investors remain in the market and capture returns when the market outperforms. 
• “Make tuning out the noise your investing superpower! There’s always uncertainty in markets, and fear is a powerful force that is difficult to overcome. For clients, higher wealth with less variability – which comes from staying invested and not trying to time markets – increases their chances of financial success.”
   

¹ Kinniry Jr., Francis, et al. “The Difficulty and Rewards of Staying the Course.” Vanguard.Com, 28 Mar. 2024.