Keep to the Course: The Risks of Not Staying Invested

Wild stock market swings? Bear market? Staying invested for the long term may keep you on course. trail: Stock market risk management and deciding when it's time to sell.
4 min read
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Key Takeaways

  • When the stock market swings wildly, keep a handle on emotions such as fear
  • A long-term strategy may mean staying invested, including more risk exposure than cash 

  • Your asset allocations during a bear market may depend partly on your time until retirement

Imagine you buy a home and then the real estate market in your town collapses, costing you 50% of the home’s value. You could sell the house at half its price and move to a rental with what’s left, stay put and hope the market recovers, or invest the remaining money into a home in a better neighborhood where the real estate market looks more lucrative in the long run.

As an investor—whether it’s in real estate or the stock market—it can be important to consider every opportunity and stay invested to your comfort level. When times get hard on Wall Street or on your own street, the danger is reacting out of fear and running away. Research has shown that investors often do worse if they close all positions during a market downturn and try to time the market. Instead of trying to time the market, it can often be more constructive to think of those times as a chance to evaluate the path ahead and perhaps shift gears. Skate toward where the puck might be soon instead of where it is now.

This is harder than simply cashing out, or even staying the course and holding on to what you have through a downturn, as so many financial articles advise you to do. But using a downturn to evaluate the market with forward-looking opportunities in mind can conceivably help give you a better chance to meet your long-term goals.

Why Cashing Out Can Hurt

If you think back to when you were just starting out as an investor, maybe you can remember a more experienced relative or friend reminding you of that old market expression: “You don’t lose any money until you sell the investment.” They were right. 

If hard times come and you get fearful and shift to cash, you’re still making a choice about what you’re investing in. You’re making your choice about the future. In the case of switching to cash, your choice is to invest your money in a nonperforming asset. Check the recent yield on savings accounts if you don’t believe this.

In a downturn, you may be looking at a stock you’re holding and worrying about the potential for it to sink further. But if you get out and it goes up, all you’re doing is realizing that loss. If you’re selling something because you lack confidence that it can rebound, you might want to ask yourself why you got into it in the first place.

Preparing to Pivot in a Downturn

Instead of selling in the middle of a messy market, maybe ask yourself if the fund or stock you want to sell still fits your long-term investing strategy. If so, the lower price might represent an opportunity to add more shares to your portfolio rather than exit.

On the other hand, maybe the downturn offers a buying opportunity somewhere else. If you’ve lost confidence in a particular company or sector, it might be a good time to shift funds to another part of the market instead of cashing out. This means reevaluating the landscape.

For instance, maybe you conclude that value stocks might make more sense at a particular juncture than cyclical stocks, or that transports no longer fit into your strategy but semiconductors possibly do. Then, instead of taking your cash and going home, you make a move that can potentially position you to take advantage of the trends you see.

This illustrates the power of staying invested. You could just grit your teeth and hold on through a steep downturn like the 2020 coronavirus pandemic or the financial crisis of 2008. But that isn’t positioning yourself to look for opportunities and make sure your portfolio still fits your long-term plan. The tough times are when opportunities often present themselves for those prepared to go in with their eyes open.

For instance, it can be frightening when a bear market roars. But as some companies emerge from the bear market, they could be more likely to see significant gains, simply because their prices have fallen so much. If you own such a company’s stock and still feel the company has a strong position and is well managed, perhaps that’s an opportunity to add to your position.

Also, debt generally rises in tough times due to increased buying of debt securities like bonds and falling interest rates, so the forward-looking risk of these so-called “safe-haven” assets may actually increase just as investors rush toward them in a market downturn. So beating a path toward defensive assets with so many other investors might put you in worse shape than you already were. 

That doesn’t mean you can always win by investing when the chips are down. Do your research and make your moves carefully. After all, some companies see their stocks fall because they’re in real trouble and may go out of business. Looking ahead means being aware of the risk, making sure any moves you do make still fit into your long-term goals, and being careful. It doesn’t mean rushing pell-mell into something you don’t understand just because prices have fallen. 

Even if you don’t decide to reevaluate and pivot when the market hits the skids, it’s often best to stay the course rather than jump out, no matter what stage of your investing life the downturn happens in.

Fear vs. Greed—or Impatient vs. Patient?

“The stock market is a highly efficient mechanism for the transfer of wealth from the impatient to the patient.” —Warren Buffett

The stock market has an uncanny ability to do the exact opposite of what conventional wisdom suggests. There’ve been enough “snap-back” recoveries that get to the heart of Warren Buffett’s sage advice: “Buy when others are fearful and sell when they are greedy.”

Admittedly, human beings are emotional creatures, and money can trigger all kinds of feelings, including fear. But if investors sell out of all their stock positions during panic moves, they could miss out on snap-back recoveries and have to buy back at a higher price.  

That old fishing yarn about “the one that got away” comes to mind here. If enough fish get away, you might give up the hobby without ever reeling in a big catch. It works that way with stocks too. Every time you panic and sell when the market is falling, it can reinforce your doubts about rebounds in the market and leave you less likely to invest in the future.

The idea is to stay invested in good times and bad, but also to consider looking for new opportunities when the market gets battered and bruised. 

Advantages of Staying Invested

Your experienced relative who talked to you when you were starting out might also have explained the importance of having an investment plan and sticking to it through thick and thin. Maybe it seemed easy at the time, especially as you watched your portfolio climb the ladder year after year through long rallies like the ones in the 1990s and 2010s.

It’s the other times that test investors’ mettle and can sometimes knock them on their backs. When the market drops 30% in less than a month, as it did between late February and late March 2020, the space under the mattress starts to beckon as a secure spot for your cash. If you’re an investor who’s close to retirement, you might be kicking yourself for putting funds you need to live on into a market that’s suddenly biting you back.

However, if you planned properly during the good times, you’ll hopefully be set up to get through the bad ones, especially if you can keep your emotions under control. That’s true even if you’re taking a set percentage out of your retirement fund to live on each year. 

For instance, many experienced financial planners would suggest that people approaching retirement or in retirement have a portfolio that’s heavier on bonds but still hold some stocks (this can differ for everyone depending on individual circumstances and goals). Bonds, though, are still less conservative than cash and subject to ups and downs in the market. In other words, older investors still generally benefit from having some exposure to risk.

Even the most conservative portfolio doesn’t consist entirely of cash (or even have large amounts devoted to cash), because cash tends to drag down your performance. For instance, if your portfolio is 80% in cash and has 25% gains, you’ve really only made 5%. As an older investor with a more conservative portfolio, you’re hopefully not going to feel as much of a pinch from the bad times as you did when you had a more aggressive portfolio and more time to grow it.

That’s why, if you are nearing retirement, it might be a good time to check with a financial planner. He or she might be able to help you shift to an asset allocation that hopefully positions you to ride through market downturns with fewer scrapes.

Younger Investors and the Power of Patience

If, on the other hand, you’re many years from retirement, staying invested can also have benefits. There are three main factors when it comes to growing your long-term retirement fund:

  1. The amount of money you invest
  2. The rate of return you get
  3. How long you let your money grow

If you leave your earnings invested, the power of compounding can often work to your advantage. There are studies that support the idea that long-term, low-turnover investing outperforms other investing styles. This doesn’t mean you won’t see your portfolio take a dive now and then, because recessions are a normal part of the economic cycle and aren’t going away. No one can guarantee you’ll make money in the market, no matter how long you invest.

However, one study by Standard & Poor’s looked at every significant pullback in the S&P 500 Index since 1945 and concluded that investors were better off riding out the market dips rather than trying to trade around them. According to a Mairs & Power white paper, the 59 pullbacks between 5% and 10% took one month on average to unfold and two months to recover to pre-decline levels.

Even longer-term bear markets don’t tend to last long enough to outweigh the advantages of compounding.

History is no guarantee of future performance, but market research firm CFRA found that there have been 13 “bear markets” with 20% or worse losses since World War II. On average, it’s taken a little over two years for these bear markets to return to break-even levels, CFRA said. Two years can seem like forever when you’re looking up from the bottom, but if you’re a seasoned investor, you’ve likely lived through several of these and still have seen overall portfolio growth.

All this doesn’t mean you can never sell anything, ever. There’s nothing wrong with taking some profits off the table or shifting assets from one type of investment such as stocks to another, like fixed income. That said, the mistake that too many people make is to get out all at once.

If you evaluate risk versus reward, it’s true that cash is the lowest risk you can have. It’s also the lowest reward. If you’re a younger investor, once you have enough cash on hand as an emergency savings fund to cover yourself in case of a job loss or a sudden life change, you may not need to also have cash in your investment portfolio. Unless it’s there to steer into a future investment opportunity—perhaps when the market has one of its regular hiccups.


Key Takeaways

  • When the stock market swings wildly, keep a handle on emotions such as fear
  • A long-term strategy may mean staying invested, including more risk exposure than cash 

  • Your asset allocations during a bear market may depend partly on your time until retirement
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