After the steep rally from March 23’s lows, many major indexes finished Monday a hair removed from pre-bear market highs: The MSCI World Index is down -5.3% and the S&P 500 is down just -3.9%.[i] The NASDAQ? Up 1.4%.[ii] If the S&P 500’s gains continue, it would rank among its quickest recoveries in history. However, just because the stock market has mostly climbed back from panicky bear market lows doesn’t mean behavioral risks aren’t present. They just change. As markets near pre-bear market levels, many investors experience an urge to sell, fearing a renewed drop. We call this, “breakevenitis” and in our view, it is a counterproductive urge. No one bought stocks with the objective of going through a frightening downturn and holding to breakeven. Times like this are a call to refocus on your long-term goals and needs—not what stocks have just done.
Hitting a breakeven point—and getting out—may seem to provide relief. To many, seeing their portfolio values fall sharply in a bear market or correction leads them to want to step off the proverbial rollercoaster. Many who suffer breakevenitis correctly and commendably held on when stocks were in the bear market’s throes. But now, with stocks nearing pre-bear market highs, they don’t want to “risk” a recurrence. Given markets’ rally, they rationalize, it isn’t like selling locks in losses. Acting on this urge may provide you with emotional relief, but that short-term perceived benefit can bring tough long-term consequences. What if that second shoe never drops and you miss a good chunk of bull market returns? If you think of “risk” not from the standpoint of enduring short-term declines, but rather, failing to achieve your longer-term financial goals, there is every chance selling at breakeven could increase your personal risk, no matter how good it feels in the moment.
Generally, people own stocks for long-term growth, whether to avoid depleting savings in retirement or for some other, larger purpose requiring market-like returns over time. That often means you need growth over your entire investment time horizon—the length of time money must be invested to reach your financial goals. This could be decades. Given medical advances, lifespans are lengthening. A healthy 60-year old today has a high (and rising) likelihood of hitting 90. America’s fastest growing demographic is 100-year olds. The S&P 500, the stock index with the longest reliable dataset, has averaged 10.8% annualized total returns since 1925, a figure that includes all historical bear markets.[iii] Achieving stocks’ high long-term returns, though, generally means participating in bull markets—especially early bull markets, as these gains compound later.
Enduring a big downturn, holding on and selling at breakeven isn’t consistent with reaping bull market returns. What about the future? How do you decide when to get back in? How much return might you miss? In our experience, investors who move to the sidelines often seek the perfect reentry point when things “feel” sunny. But then they never find a better buying opportunity and wait until late into a bull market to reinvest. Waiting for all-clear signals—which markets don’t give—can be extremely costly.
We think the best approach is to pick an asset allocation that offers the highest likelihood of reaching your goals. If you had that before the bear market, selling at breakeven amounts to getting on a path that may not be likely to reach your goals—in our view, the single greatest risk you can take. Not that we advocate buy-and-hold. It makes sense to deviate from a strategy if you can identify a probable bear market as it is forming. But the key to spotting a bear market is spying a future negative shock nearly everyone else doesn’t. That last part is key. Efficient markets typically factor in things (positive or negative) that investors commonly discuss or fear. That an index level is near where it was before doesn’t meet that. Nor does an account value regaining some high-water or other arbitrary mark.
If you hold on through a bear market and most of the initial recovery, selling at breakeven increases the likelihood you are selling ahead of more bull market. After breaking even, stocks average 44 months—almost four years—to the next bear market.[iv] Of course, averages don’t predict. But regardless, we think investors needing equity-like returns for some or all of their portfolios need a solid, fundamental reason that isn’t widely known to be out of stocks. Factors like terrible economic data, inflation or deflation fears, a potential COVID second wave or debt are on virtually everyone’s minds. We suspect these common fears are actually the first bricks in a new bull market’s wall of worry.
Of course, your goals can change. Perhaps that has happened to you, which may mean a lower equity weighting is in order. But make sure any change in your financial goals is for forward-looking reasons and not influenced by the bear market. Your financial plan and asset allocation should be designed to withstand bear markets.
[i] Source: FactSet, as of 6/9/2020. MSCI World Index returns with net dividends, 2/12/2020 – 6/8/2020, S&P 500 total returns, 2/19/2020 – 6/8/2020.
[ii] Ibid. NASDAQ total returns, 2/19/2020 – 6/8/2020.
[iii] Source: Global Financial Data, Inc. and FactSet, as of 6/9/2020. S&P 500 total returns, December 1925 – May 2020.
[iv] Ibid. Average length in months from date of prior bull market high the S&P 500 price index reached to the next bull market peak, 12/31/1925 – 2/19/2020. We consider a month 30.5 days for this analysis.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.