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Inflation is sky high, recession worries run rampant, and stocks are getting pummeled. Your first impulse may be to join the selloff, but it's actually extra important that you keep your money invested right now.
If you're invested in stocks and constantly checking on your portfolio, you probably haven't had a great few weeks. The S&P 500 dipped into bear market territory on Friday, the Dow Jones Industrial Average is down around 15% for the year, and the tech-heavy Nasdaq has fallen 28% in 2022.
Even though the market declines may make you feel uneasy, keeping your money in the stock market now is likely a good move long term. That's because the market's best days tend to happen right around the market's worst days. Between January 1, 2002, and December 31, 2021, seven of the S&P 500's best days occurred within just two weeks of the index's 10 worst days, according to J.P. Morgan Asset Management's 2022 "Guide to Retirement" report.
"The pendulum in the stock market swings very, very wildly," says Jack Manley, a global strategist at J.P. Morgan Asset Management. "When things get out of whack, they swing back very quickly."
Why the stock market's best days are so close to the worst days
Markets today are fundamentally different from how they were 10 years ago, Manley says. That's because technological innovation has led to developments like high-frequency trading, which involves large volumes of shares being traded at high speeds. But it's also led to a boom in retail investing.
We especially saw that boom during the pandemic. COVID-19 kept many people at home, where they took up investing as a hobby. Stimulus checks from the federal government gave retail investors more money to buy stocks, cryptocurrency and such, or it provided them with funds to invest for the first time.
Meanwhile, online trading platforms like Robinhood made commission-free trading easy and allowed people to buy fractional shares, meaning they could invest in a company like Tesla (which has traded at more than $1,000 per share) with as little as a single dollar.
"Information moves a whole lot more quickly," Manley says. "It is that much more easy to be an investor in today's world."
The combination of fast-moving information and more market participants means that the stock market in general is more volatile than it used to be, Manley says.
Just take a look at the last month. The S&P 500 was down 3.6% on April 29, which marked one of the worst days of the year for the index. But just a few days later on May 4, the index was up nearly 3% for one of its best days, according to data from J.P. Morgan Asset Management. And back in 2020, March 12 — the S&P 500's second worst day of the year — was immediately followed by its second best day of the year.
The market is used to being overbought or oversold, meaning there's no real "happy medium," Manley adds.
Why it's important to stay invested
While you can't predict exactly when the market's best days will be, missing out on them can cost you. If an investor had bought $10,000 worth of the S&P 500 in 2002, they'd have seen their balance grow to $61,685 if they remained fully invested over the next two decades, according to the J.P. Morgan Asset Management report. But if they missed the market's 10 best days, their annualized return would have been cut in half — and they'd only see their balance grow to $28,260.
It is especially important to maintain a disciplined investing approach when markets take a dip. If you fall prey to the temptation of selling out of your investments right now, you may be doing more harm over the long run, says Anjali Jariwala, a certified financial planner and founder of FIT advisors based in Redondo Beach, California.
"Once you are out of the market, there is a good chance you may miss the upswing when the markets rebound," Jariwala says. "They will at some point because markets are cyclical."
Most people who sell during a downturn tend to buy back into the market when it is too late and the markets have already rebounded, she adds. At that point, an investor has missed the opportunity to recoup their losses.
Plus, it's important to remember that seeing red in your portfolio doesn't mean you've actually lost money.
"None of this stuff going on in your portfolio is a loss unless you sell it," Manley says.
And that's why you probably shouldn't be selling right now.
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