Sometimes It’s Better to Do Nothing

If you’re like most investors, you got hit pretty hard in the last quarter of 2018. According to Oppenheimer, investors pulled more than $200 billion out of equity mutual funds and ETFs from October through the first week in January. And money market assets grew by $209 billion last year—more than the previous five years combined.

While some people may have had good reasons to jump out last quarter, it’s likely that a large number of investors did it simply because of fear. What did we see? The NASDAQ was down 17%. The S&P 500 was down 14%. The Russell 2000 was down 19%. With such a big drop in one quarter, there is a human instinct to try to do something about it. The problem is that “doing something” almost never works out well.

History shows us that the worst days in the market are very often followed by some of the best days in the market. And when fearful investors bail out at the trough, they miss out on any recovery—like the 8% total return gain we saw in the S&P in January (source: BTN Research, 2/4/2019). The result, as a DALBAR study showed, is that the average investor winds up lowering their overall returns significantly (source: Bloomberg, 6/11/2018; average asset allocation investor return is based on an analysis by DALBAR, Inc., which utilizes the net of aggregate mutual fund sales, redemptions, and exchanges each month as a measure of investor behavior).

So, given all of that, it’s a good idea to remind ourselves of a few things:

First, corrections in the market happen almost every year. The median intra-year peak-to-trough decline of the S&P 500 index over the past 40 years is 9%. And, on average, it takes about eight months for the market to get back to its previous high (source: Oppenheimer, 1/28/2019).

You should also remember that it’s rare for the broad market to post negative returns for two straight years. It’s really only happened three times—once in the 1970s, once in the early 2000s, and back in the Great Depression. We don’t see any signs that those market conditions are happening again.

The third thing to keep in mind is that stocks have historically gone up more than they’ve gone down. Since 1926, equities have posted positive returns over a 10-year period 94.6% of the time—and over any 15-year period 99.8% of the time. And stocks have far outperformed money markets or government bonds. A $1,000 investment in T-bills in 1926 is worth around $20,000 today. That same investment in U.S. small-company stocks is now worth more than $5,000,000! (source: Janus Funds; this information is for illustrative purposes only and not intended as investment advice.)

At Lucia Capital Group, we can help you resist your first impulse to sell in a panic, because—believe it or not—sometimes the best thing you can do is nothing at all. Call us at (800) 644-1150; we’re here to help!

Information presented should not be considered specific tax, legal, or investment advice. You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

IRA withdrawals will be taxed at ordinary income rates. Withdrawals prior to age 59½ may also be subject to a 10% penalty tax.

No client or prospective client should assume that the information contained herein (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from Lucia Capital Group, its investment adviser representatives, affiliates or any other investment professional.

Raymond J. Lucia Jr. is chairman of Lucia Capital Group, a registered investment advisor and CEO of its affiliated broker-dealer, Lucia Securities, LLC, member FINRA/SIPC. Advisory services offered through Lucia Capital Group. Securities offered through Lucia Securities, LLC. Registration with the SEC does not imply a certain level of skill or training.

Start Your Strategy

Personalized investment advice and support to help grow your portfolio