Market Downturns Might Be Good For You, Here’s Why

This is an article that you need to read immediately before you make any decision about your investment at such a time as this.

If you have been checking your stock investment returns in the last few days, you will see it’s been negative returns all along. And we know you may be worried but we would like to tell you that you don’t have to worry.

Negative returns on your stock plan simply mean assets in the portfolio are getting cheaper. Well, that’s one perspective, another person may choose to see it as declining in value.

The right perspective though is actually that it is getting cheaper. The value of the companies in our stock plan is intact. They are still executing on their mission and growing revenue and cash flow. And there’s been no news or any form of information to suggest otherwise.

However, when assets get cheaper, there’s bound to be panic. The panic sometimes leads to people making costly decisions. Decisions like pulling out of the market instead of running into it. And decisions at such a time as this are always what determines your investment success or otherwise.

As you know, we have always advocated that keeping a long term view is the best way to get the best out of the market. In the short term, the market goes up and down. In the long term, the only clear thing is the market going up.

Think about this scenario:

  • You own 1 unit of a stock that’s currently worth $1,000
  • Then the stock is down by 20% to $800
  • Out of panic, you sold that one unit to “cut your loss”. So you now have $800.
  • You planned to get back to the market when growth is restored and everywhere is green again. 
  • But the market only recovered slowly and then suddenly such that you now have to buy the asset at even a more expensive price. Which means you lose the advantage of selling to cut your loss. That is it will now cost you more than $800 to buy one unit of the stock again.

You think that’s not possible, we think it’s not only possible, but it’s also the norm. However, staying invested in the market has an advantage. And the advantage is in ensuring that you do not miss the “days that matters”.

“Days that matters”

In research carried out by JP Morgan, analyzing data between January 2001 to December 2020, 20 years. It found that missing 10 days in the markets could cost you 50% of your potential return. And missing 20 days out of 5,000 trading days within 20 years could mean you won’t make any return from the market at all.

You see, while there are about 250 trading days a year and 5,000 trading days in 20 years, a major portion of a stock’s return in that 20 years happens in about 100 trading days. This means what happens in 2% of the days decides your 5,000 days return. Since it’s difficult to foretell what those days are, staying invested with good companies is the only advantage. And that is exactly what we offer you at Risevest – a portfolio of quality companies.

JP Morgan’s research modelled a scenario where $10,000 was invested from 2001 to 2020. Then adjusted for the assumption that an investor misses a couple of days that matters. Below is the difference in the outcome from the findings.

While this is a compelling finding, what we find even more instructive is the note that accompanied the research from JP Morgan. “Seven of the best 10 days occurred within two weeks of the 10 worst days, six of the seven best days occurred after the worst days and the second-worst day of 2020 – March 12 – was immediately followed by the second-best day of the year”.

From the example of the investor above who liquidated their asset to “cut loss”, what do you think is the probability of them not missing a day like March 12 above? Very likely they will miss it, you guessed right.

This is the reason why we teach that having a long term view of your investment is the best. And we also like to emphasize that your time in the market matters more than your attempt to time the market.

Don’t time the market, just trust the process and ensure that you have a long term view. Having a long term view will of course mean the money you are investing is not your emergency fund or some amount you need within a few weeks or months.