Sure, if you missed the 20 worst trading days, you would have done much better. But most of the 20 best trading days and the 20 worst trading days happen during the same periods, often during the same months. No one can time the market so perfect as to jump in and out at the exact right days. So what happens is that those who try to avoid the market’s big drops tend to miss the market’s even bigger gains. Those who sold when the Dow was at 8,000 may have thought they were smart when it continued to fall to 6,000. But when, before they knew it, it was back above 10,000, 12,000, 13,000, 14,000 … and their attempt to time the market ended up costing them serious money. If you want to consistently enjoy the market’s big gains, you have to put up with its declines from time to time. Trying to avoid that reality is one of the surest ways to earn poor returns. This, too, is the same story over and over again.
One lesson from the past five years is that the single most important question an investor can ever ask is, “How long am I investing for?”
If you’re a day trader, a down day is a loss. If you’re five years from retirement, a down year can be scary. If you’re in your 20s and saving for retirement, a down decade means little. The same outcome during a given period of time can mean very different things for different people.
My view is that money you’ll need to access within five years shouldn’t be in the stock market at all, and money you won’t need for at least a decade should not only be in stocks, but invested with the view that at some point it will almost certainly lose half its value (temporarily). Volatility is just part of the deal. It’s perfectly normal.
If you know you’re investing for the long haul, these ups and downs — even a severe crash like 2008 — take on a whole new meaning. I think a lot of why so many investors cashed out and hid on the sidelines over the last five years is because they never even asked themselves how long they were investing for. A young worker with three decades before retirement saw markets falling, and his first instinct was, “Get out, now!” when it realistically should have been, “Look, never before in history has an investor lost money in stocks on a 30-year basis. And stocks are cheap right now. Even if they go down much further, it doesn’t make sense to sell.” On the other side, near-retirees found themselves caught off-guard when money they needed now suddenly lost half its value. So asking yourself how long you have to invest goes both ways. What’s important is that there is never a blanket definition of whether or not you should buy stocks right now. Who you are and how long you have to invest can create two different rational answers at the same time.
Someday, this will all happen again. More recessions, more crashes. And when it’s all over, the same headline — “Stocks reward those who stuck it out” — will be published yet again.
The article The Most Inevitable Headline of All Time originally appeared on Fool.com and is written by Morgan Housel.
Morgan Housel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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