Mondial Chart of the Week: Stay calm, stay invested: the facts on missing market bounce back


(Source: Momentum Global Investment Management)

90 April 2020


Stay calm, stay invested: the facts on missing market bounce back

Source: Bloomberg & Momentum Global Investment Management


CONTENT:

  1. What this Chart Shows

  2. Why this Chart is relevant


What this Chart Shows

This bar chart shows the result of $100,000 invested in the US equity market at the start of this century based on five different scenarios. An investor who remained fully invested throughout would have a portfolio worth $268,509 today (based on index total return). This approach is compared to four other scenarios, each with the investor withdrawing their funds at the bottom of every bear market, defined as a 20% peak to trough fall, before reinvesting at a later date. Each blue bar chart represents a different scenario, based on the amount of time that the investor doesn’t participate in the market after every trough, ranging from one week (five trading days) to two months (40 days). Over the course of the century there have been four periods when the market has fallen 20% or more with troughs in 2002, 2009, 2018 (we have included this sell off though the index fell just shy of 20%) and 2020. There is a substantial difference, just under $100,000, in the end portfolio result from remaining fully invested compared to withdrawing investments for as little as just five days after each bear market. The chart paints a worst-case scenario – the impact of selling at the bottom after every bear market and missing the subsequent recovery.


Why this Chart is relevant

Loss aversion is a concept that states investors feel losses more severely than they appreciate equivalent gains. At a time when markets have fallen so sharply, loss aversion can cause many investors to sell their investments and reinvest at a later date. Furthermore, they can compound this mistake by doing the same thing repeatedly. This chart shows the impact this can have on long term compounded returns as investors miss the sharp rallies that occur when markets recover. Staying invested means you experience the down days, but you also fully participate in the up days too​​​​​​​.

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