Doing nothing often denotes laziness, but when it comes to your investment strategy, doing nothing is often the smartest move you can make.
Historically, the market has experienced periods of increased volatility, most recently during the Covid-19 crisis when investors got taken on a frenzied ride. And though it might be tempting for you to sell during those times, let’s look at a period of volatility – one that occurred long before anyone had ever heard the term Covid – for some context and see why it’s better to focus on the long term, and instead, do nothing.
On Jan. 26, 2018, the Dow Jones Industrial Average reached a new record high of 26,617, but then one week later, on Feb. 2, it took a 666-point dive, losing 2.5% of its value. The following Monday, Feb. 5, the Dow continued to decline and experienced its largest one-day point drop in history – 1,175 points, or 4.6%.
On Tuesday, Feb. 6, the Dow regained almost half of its losses from the previous day and closed up 567 points, and on Wednesday, Feb. 7, the Dow only lost 19 points. But Thursday, Feb. 8, brought another big drop of 1,033 points, or 4.1%. On Friday, Feb. 9, the Dow returned to positive territory and gained 330 points, or 1.4%.
This volatility continued, and by April 2, the Dow had dropped 3,272 points, or 12.29%, from its Jan. 26 record high.
During this time, the ups and downs came fast and furious. The daily point swings ranged more than 500, 1,000, even 1,500 points intraday, and on one particularly volatile day, Feb. 6, the Dow crossed the zero line between gains and losses 28 times.
Those who were glued to CNBC all day, or tracked the market’s valuation in real time on their smartphones, were probably having panic attacks. Stress levels must have skyrocketed.
Yet, just six months later, on Oct. 3, the Dow hit 26,828 – a new all-time high.
We’re sure you’ll agree that watching every market fluctuation – especially during volatile times like we have now – is not a very good way to spend your day. It’s far better to pay little or no attention. That ensures you won’t get upset, which means you won’t panic, which means you won’t sell while prices are momentarily low.
Not paying close attention means you’ll do nothing. And doing nothing – taking no action and letting this pass by – lets you remain consistent with your long-term strategy.
If you’re among our clients, you’re familiar with that logic. It’s the advice we’ve been giving you for years: Ignore wild market gyrations. Stay above the occasional fray. Sit pat and do nothing when market volatility occurs.
We offer this advice, not because we can predict what the stock market is going to do tomorrow, but because history is on our side.
You can review that history by looking at the following chart. We consider it the most important chart ever published on personal finance.
It shows that when stock prices are rising, they rise quite a bit and for a long time. And when they fall, they fall only a little by comparison and for shorter periods.
What does that tell you? That all you have to do is … nothing. You’re invested for the long term, so what the stock market does today, tomorrow, next week or next month doesn’t matter. With a long-term perspective, you can simply wait it out.
Unfortunately, thousands of investors didn’t do that. On Monday, Feb. 5, the day with the biggest point drop, retirement savers moved funds from equities to money-market and fixed-income funds at a rate 12 times the typical pace, according to the Alight Solutions 401(k) Index™. All they succeeded in doing was selling at a low and locking in their losses.
But by following our advice, not panicking and selling at a loss, and instead tolerating the volatility and wisely waiting for it to end, you can view the downturn as a buying opportunity and add money to your accounts before prices rise!
Of course, the strategy of buying while prices are low, or simply ignoring market volatility and essentially doing nothing, works with this proviso: It’s most effective when you have a well-diversified portfolio – a sophisticated asset allocation that is consistent with your long-term goals.
If you aren’t sure whether your investments are well diversified, or if you were shocked at how much prices can quickly fall in a market downturn, you should view recent events as a signal to have a conversation with an independent, fee-based financial advisor who can help you.
Once you’ve done that, the next time the market takes a plunge, you too can relax and simply do nothing.
An index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance does not guarantee future results.
Investing strategies, such as asset allocation, diversification, or rebalancing do not assure or guarantee better performance and cannot eliminate the risk of investment losses. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Funds and ETFs are subject to risk, including loss of principal. All investments have inherent risks. There can be no assurance that the investment strategy proposed will obtain its goal. Past performance does not guarantee future results.
Updated July 20, 2021