3 Facts About the Stock Market You May Not Know
Key Points
Missing the best days of the year can be more detrimental to your return on investment than you may think.
What happens in a single day does not predict long-term trends.
Managing risk tolerance is crucial for success because you want to have peace of mind when investing.
Investing in the stock market is a great way to build and maintain your wealth, if it’s done strategically. For high-net-worth clients, the market presents opportunities for significant investment returns. As we all know, however, those opportunities aren’t without risk. As volatile as the market may sometimes be, there are proven investment strategies we can glean from history. After all, the New York Stock Exchange started in 1792.
There are three facts about the stock market you may not know. Each one helps inform recommendations your financial advisor may make, so knowing them will help you make safer decisions.
1. Missing the Best Days Can Be Detrimental
We know the stock market can be very volatile over short periods of time. That’s why it's very important that we have a comprehensive understanding of our client’s unique risk tolerance before implementing an investment plan. When headlines start predicting doom and gloom or the stock market starts to pull back, investors understandably begin to wonder if they should get out of the market in favor of cash. In most cases, we caution our clients against this because of the unpredictability of when the market will recover. Missing out on the market’s best day(s) during a recovery period can have a lasting negative impact on your investment success
Several studies show missing even just a few of the market's best-performing days can significantly impact your investment returns. For example, one study found that an investment in the S&P 500 Index between 1995 and 2014 would have returned 9.85% annually. That is, if you stayed in the entire time. When an investor missed the top 10 best-performing days during those years, the annualized return dropped to 6.1%.
A FirstTrust study shows missing the best 5 days leads to a 35% loss and missing the best 10 days puts the portfolio at a 51% disadvantage. Likewise, a Fidelity study proves you’ll receive 37% less if you miss the best 5 days and 55% less if you miss the best 10 days. There is clearly a downside of trying to time the market or fear-based decision-making.
2. Single-Day Performance May Not Indicate Long-Term Trends
This next fact may seem to contradict the first. While it's tempting to believe that investing on the stock market's highest-performing single day would lead to substantial gains, the reality is more nuanced. Various factors, including short-term market sentiment, current news events, and speculative trading influence single-day market performance.
While this seems contradictory, it actually aligns with the overall theme of staying the course with your investment strategy. Investing in the stock market should be considered a long-term venture. Positive news or market speculation from financial media outlets can often result in a quick surge in the market. Out of fear of missing out on big returns, investors can quickly become overly aggressive with their investments and take on more investment risk than what they have the capacity for. Overreacting to positive news or recent sharp rises in the market can quickly expose investors to the risk of a subsequent market correction, which could erase gains and lead to significant losses.
3. Risk Management Is Essential
Investing is not solely about maximizing gains. It’s also about managing a portfolio that aligns with your risk tolerance. Maintaining a diversified portfolio, conducting thorough research, and adhering to a disciplined investment strategy with a long-term perspective are key elements that will lead to investing success. While high-performing days can be enticing, they should not be the sole basis for investment decisions. Taking a holistic approach that considers risk management can provide more consistent and sustainable returns over time.
When managing our high-net-worth client portfolios, we look at the big picture. Everyone’s situation is unique, and we consider personal situations and financial goals. If you’re interested in meeting with a Capstone Wealth Advisor, please contact us today.
Disclosures:
This article is not a substitute for personalized advice from Capstone and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed by other businesses and activities of Capstone. Descriptions of Capstone’s process and strategies are based on general practice, and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review by contacting us at capstonefinancialadvisors@capstone-advisors.com or (630) 241-0833.