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What a difference a month can make! Most equity markets have rallied between ~10% and ~15% since I wrote my last commentary. This rally seemed nearly impossible a mere five weeks ago. Much of it stemmed from President Trump’s 90-day tariff pause and temporary de-escalation with China. It’s important to remember that history shows markets tend to rally when we least expect it, and in a very short time.
With this recent recovery, several equity markets are near even on the year, while foreign equities continue to shine and are off to one of their best starts in decades. How all this plays out remains to be seen. Could we retest the lows of April if no substantial progress is made on the global trade front? Absolutely, but we do not recommend making portfolio decisions based on what may or may not transpire.
At the same time, it’s fair to say that markets may have gotten a bit ahead of themselves and are a tad too optimistic, as plenty of uncertainty remains. As witnessed by the volatility over the past few weeks, markets likely need more clarity before they take the next step higher.
As you can tell, I am talking a bit out of both sides of my mouth here, and by design. We have said time and time again, trying to time markets is NEVER AN ADVISABLE STRATEGY. Case in point: On April 9, the S&P 500 had one of its best days in history with a stunning ~9.5% increase!
Think about that for a second. In one trading session, it rallied with nearly one year’s worth of historical gains! I should mention that the S&P did drop a significant amount in the week leading up to this historic day, but few investors sold before the decline. Instead, many ended up selling at or near the bottom once again, and missed out on this historic day, the eighth-largest daily percentage gain for the S&P 500 since 1923!
As seen on the chart below, missing some of the best days has been very costly. While we can’t eliminate volatility from markets, we need to remember that they go up far more often than not. The issue is that the pain of losing sticks with us more, and we can recall those periods more vividly than when markets gain.
I know this because a few years ago, I conducted my own social experiment of sorts and asked well over 100 people the following question: “Since 2000, in which year did the S&P 500 have its best return?” Not only did no one get it right, but they weren’t even close. I had to ask myself, “How did no one recall that the S&P 500 returned a tad over 32% in 2013? How is that possible?”
The reality is we remember the losses, which makes sense to a certain extent. Losing hurts—no one likes to see their portfolio decline in value. In addition, even if you don’t look at your portfolio, losses are plastered over the news, so you can’t really avoid seeing or hearing about them.
On the flip side, we’ve generally grown accustomed to markets having a good year, as markets go up far more than not. The good years get very little news coverage, so there’s that too.
Now I know what you’re probably thinking: How could anyone miss the best 10, 20, and 30 days during this period? While it’s highly unlikely, many have missed out on a handful of them. The irony is that since 1995, half of the best days have taken place during a bear market. This is when people are most likely to panic-sell, so they end up missing out on the subsequent gains. We don’t have to look back very far, as many investors sold during this recent downturn and Covid (2020).
Even missing three of the best days would have a drastic impact on your total return.
As we always say, investing is hard. It will test your patience many times over. It will never be “easy,” but you can make it easier on yourself by making sure you are following a financial plan that will help put you in a better position to avoid making the same mistakes that many fall prey to.
Feel free to discuss your situation with our financial planning firm.
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