If you sold your investments each time there was a headline grabbing event, your portfolio would not have thanked you. Major events whether a historical election that we just had in the United States, a geopolitical conflict like the Russia invasion of Ukraine, a test by Mother Nature such as Hurricane Katrina or a financial driven event including the Global Financial Crisis introduce uncertainty. And instinctively, one of the human reactions to uncertainty is to flee. For an investor, that might prompt the decision to move their portfolio to cash. History shows that decision is not the best course to take.
Selling during times of uncertainty often results in selling low and missing out on the recovery. It also turns off the dividend income tap. That stream of income can be all the more important during market pullbacks when dividends can be reinvested into shares trading at depressed valuations.
It may feel good to take immediate action, but it will not be rewarded in the long-term. Uncertainty and some volatility in share prices are the costs (and ultimate reward) of capital appreciation over the long run.
The chart below shows the last 20 years for the S&P 500 plots some of the major events that we have been through. Those events filled our newspapers and now social media feeds with pessimism, concern and fear. Bad news sells after all. Equity markets often moved lower on the events and sometimes quite dramatically. At other times the news was brushed off by markets quickly, but in all cases markets recovered.
Putting the events into the context of a long-time horizon takes away the emotions and shows that markets rebounded to new highs. Portfolios grew in value along with the dividend stream.
Over the period shown below, the S&P 500 had an annualized total return of 10.3% despite all the worrying events, conflicts and changing governments over the past decades.
Bottom line: don’t make decisions when you’re the most emotional. When a portfolio’s asset allocation was initially decided upon, it was a carefully considered decision between you and your advisor to meet your personal financial goals. Unless something has changed in your financial situation, that asset allocation is likely still appropriate. Stay the course and touch base with your advisor with any questions. Calmer waters will follow the turbulent times.
