Fisher Investments Reviews the Cost of “Breakevenitis”

illustration of a man stuck in a lowered section of a road

Fisher Investments Market Perspectives

By Fisher Investments — 8/31/2023

As humans, it’s natural for our emotions to get the best of us when it comes to investing. When the market thrives, it’s easy to feel confident and optimistic. But when it falls, it’s even easier to feel apprehensive and be tempted to minimize downside risk. These emotions, deeply rooted in a behavioral psychology phenomenon called “myopic loss aversion,” are driven by our natural tendency to feel the pain of loss vastly more than we enjoy an equivalent gain. This is why, after experiencing a correction or bear market, it can be tempting to exit the market once it recovers. As Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer, Ken Fisher, shares in his commentary—Ken Fisher on the Dangers of “Breakevenitis”—this temptation to “get out” once markets recover is called “breakevenitis,” and it can cost you. In this article, we’ll explore the dangers of succumbing to this temptation and the benefits of fighting this instinct, especially if your long-term goals require equity-like growth.

Stay Disciplined, Better Times Ahead

Again, because we’re human, trying to avoid losses can feel worth it, even if it means potentially missing market gains. However, bull markets typically can go on to many more all-time highs after recovering from a bear. As demonstrated in the chart below, the 2009–2020 bull market returned 99% beyond the market’s previous high (i.e., breakeven point) which, when compounded on the bull’s initial 136% return, resulted in a 369% cumulative return.

The Real Cost of “Breakevenitis”

Let’s look at this differently. Hypothetically, if you invested $10,000 in the MSCI World Index on the first day of 1970 and left it sitting there through the end of August 2023, your portfolio would be sitting at over $1.35M. However, the value of your investment—had you gone to cash at respective “breakeven” recovery points (shown in yellow below)—would have suffered. Remaining invested, even when your instincts tell you otherwise, can have real benefits.

Remember, Bulls Charge Beyond Recovery

The urge to sell out of stocks as they approach breakeven often arises at a terrible time—an early bull market. As the chart below shows, since 1945, US stocks have continued rallying after markets broke even, adding average and median gains of 118% and 47%, respectively (middle column.) There are some periods when the post-breakeven gains aren’t as high, but there are robust gains in many instances. In order to have captured those additional gains, investors would have needed to stay in stocks and avoid selling at breakeven. Moreover, when these post-breakeven returns are compounded on the earlier gains of prior bull markets, the cumulative returns generally are even higher (far right column.)

When faced with market volatility, keep in mind that stocks yield a roughly 10% annualized average return over the long-term*, inclusive of corrections and bear markets. When markets are choppy, it seems only bad news abounds and the return of “the good times” seems out of sight, remember, seeking stability isn’t always the right instinct to chase and can have real opportunity costs. To help maximize the chance of reaching the financial future you envision, stay disciplined by sticking to your long-term investment plan.

For more market insights from Fisher Investments, read our latest articles.

* Source: Global Financial Data, as of 3/15/2023. Based on annualized S&P 500 Total Return Index returns from 12/31/1925 – 12/31/2022.

Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. The results for individual portfolios and for different periods may vary depending on market conditions and the composition of the portfolio. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice. Nothing herein is intended to be a recommendation. The opinions expressed are subject to change without notice.

Image of 15 minute retirement plan guide

4 Ways to Avoid Running Out of Money in Retirement

If you have a $500,000 portfolio, download the guide by best-selling author and money manager Ken Fisher’s firm. It’s called The 15-Minute Retirement Plan. Even if you have something else in place right now, it still makes sense to request your guide!

A man smiling and shaking hands with a business partner

Learn More

Learn why 150,000 clients* trust us to manage their money and how we may be able to help you achieve your financial goals.

*As of 3/31/2024

New to Fisher? Call Us.

(888) 823-9566

Contact Us Today