With the stock market flashing more red than green these days and economists warning that the chances of a recession are rising, some investors may be eyeing the exit sign.
But by leaving now you risk missing the best days of the market, experts say.
“High volatility doesn’t mean only downside volatility,” said Veronica Willis, an investment strategy analyst at Wells Fargo Investment Institute. “During a downturn, the market is at its most volatile and will experience both sharp up and down days.”
In other words: The days with the biggest gains and the days with the steepest losses are often so jumbled up you can’t get one without the other.
Up days follow down days
Research backs up that connection.
A recent J.P. Morgan analysis found that the market’s 10 best days over the past 20 years occurred after some of its worst days — including those during the 2008 financial crisis and at the onset of the Covid-19 pandemic in 2020.
On top of that, the market has historically produced some of its highest returns in the wake of a downturn.
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The S&P 500 rose 75% in the year following the end of the 2020 bear market, which was stirred by the coronavirus pandemic. That may be an unusually large rise, but still the profits on stocks are bigger after market drops than during calm chapters, according to a Wells Fargo analysis.
The investment bank found that in the 12 months after bear markets, the S&P 500 index tended to be up around 50%, compared with 30% during periods where there were no recessions.
Why staying the course can pay off
As a result, financial advisors recommend continuing your investing amid rough patches in the market and even increasing your contributions, if you can afford to.
Past history shows that doing so pays off.
A $5,000 investment in the S&P 500 at the bottom of the Great Recession (March 9, 2009) would have been worth more than $36,000 at the start of July, according to an analysis by Morningstar Direct. The same investment at the lowest point of the pandemic downturn (March 23, 2020) would have grown to nearly $9,000 by this month.
High volatility doesn’t mean only downside volatility.Veronica Willisinvestment strategy analyst at Wells Fargo Investment Institute
The JP Morgan analysis had a similar finding: Someone who invested $10,000 in the S&P 500 on Jan. 1, 2002, would have a balance of $61,685 if they remained invested through Dec. 31, 2021. By missing the market’s 10 best days over that 20-year period, they would have $28,260.
“In a down market, every dollar you can invest goes further, with more room to grow over time,” said Rob Williams, managing director of financial planning at the Schwab Center for Financial Research.
How to prioritize investments, other goals
While investing during market volatility can help set you up for success, that doesn’t mean boosting your investment contributions should be your first financial priority.
Before you direct more of your money into the market, make sure you have an adequate emergency savings account, Williams said.
Most experts say that means three to six months worth of your expenses salted away. If you don’t have enough cash at the ready, you risk needing to sell your stocks when they’re at a discount if you lose your job or have another sudden financial setback.
If you have any high interest debt, focus on paying that down prior to investing more in the market, said Bryan Stiger, a financial planner at Betterment. The interest rates on your credit card may be higher than your potential market returns.
Once you have those financial basics shored up, where you direct your additional investments is another important consideration, experts say.
Make sure that you’re putting as much as you can into tax-advantaged retirement accounts, including any 401(k) plan or individual retirement accounts, Stiger said. Hitting the limits here typically comes with benefits you won’t get with a regular brokerage account.
For example, your 401(k) contributions allow you to reduce your taxable income and sometimes come with a company match. Meanwhile, a Roth IRA uses post-tax dollars, but then allows your money to grow tax-free.
Beyond retirement, Stiger said, “Are there other particular goals you want to save for? Like a home or college for your children? Excess funds you have can be invested to fund these.”