Staying in the Game
By Tanner Freeman
When I was growing up in Vernon, Vermont, my family and I attended a few UMass-Amherst basketball games a year. During uncompetitive games, a favorite strategy of my dad’s was to leave a few minutes before the final buzzer in attempt to beat the crowd out of the stands. One night, UMass played its rival Boston College in a close game, until BC pushed its lead to 8 points with 45 seconds left. My father exclaimed that the game was over. Keys in hand, he led us to the door. Of course, he was not alone in this decision, as other fans had the same thought in mind. While we were racing other attendees to our respective cars, a group of college kids drove by, exclaiming the game was heading into overtime and honking their horn as they peeled away. We turned on the radio to find UMass had indeed mounted a late game comeback to push the game into overtime! Not only had we missed a great ending, we didn’t beat the traffic, and we had to listen to the final minutes in the car.
As of the time of this writing, the S&P 500 Index was down 13 percent year-to-date. Investors certainly have headlines to worry about. Global supply chains continue to be backed up, a war is raging in Eastern Europe, and price inflation not seen for four decades is worrying the world –all motivating many investors to make an exit from the stock market, at least temporarily.
During periods of heightened volatility, it is natural for investors to think about selling securities in hopes of buying them back later at lower prices. Much like my father thinking he can beat the crowd, some investors act too soon in trying to avoid or minimize market declines. Unfortunately, human beings are not very good at predicting near-term outcomes. Even professional economists and market strategists have a poor track record of correctly predicting what will happen in the next year or two.
It is important to understand market history at a time like this. We know it is not uncommon for pull-backs to occur. During the past 42 years, the average intra-year drop in the S&P 500 has been 14 percent. However, in those years the index has recovered 76 percent of the time and ended in positive territory.
In the short-term, market direction relies heavily on investor psychology, not the quality of businesses that underlie their investments. A study done by JP Morgan analysts looked at data from January 2000 to June of 2020. They found that eight of the best 10 days in the market happened within two weeks of the 10 worst days. That is to say, investors became optimistic shortly after being their most pessimistic. While this is a great example of the behavioral aspect of markets, the true lesson comes from the consequences of attempting to by-pass market volatility. During that 20-year period, a $10,000 investment grew to be $26,067. Yet, if investors attempted to predict short-term fluctuations and missed just 10 of the best trading days, their investment grew to only $12,031. The best 10 days of market activity accounted for more than half of returns in a 20-year period. Shockingly, by missing the best 20 days, investors had a negative return over that period.
At Trust Company of Vermont, we take a long-term view to help clients reach their financial goals. Apart from knowing short-term predictions are futile, we have observed that their consequences can be destructive for long-term returns. With an understanding of history – and of course by carefully choosing and following high-quality stocks – we believe that staying in the game during volatile periods offers the best chance for long-term success.