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A few days of losses may entice some investors in the stock to sell and run for cover.
But this is exactly what should not be done.
The reason: days when stocks suffer big losses are often followed by days when they pay off. If you sell, you can skip the side – and it will cost you.
“You tend to see that the days of the fall are accompanied by very, very strong days,” said Jordan Jackson, global market strategist at JP Morgan. “These strong days are really very important in terms of overcoming the volatile storm.”
The S&P 500 is down about 15.9% to date in 2022, while the Dow is down 11.3% this year.
However, according to Jackson, even the biggest fluctuations indicate the need to maintain the course.
April 29, the worst day for the S&P 500, the market fell 3.6% for the day. Then, five days later, you had a better day on May 4, when the market rally was 2.99%.
Moreover, on March 7, the S&P 500 fell by about 2.95%. Two days later, on March 9, the index rose 2.57%.
Jackson said the best and worst days tend to come together.
“Trying to distribute the market is likely to cause you to miss some really, really good days,” he said.
Keeping the course also proved to be a more profitable strategy during a pandemic.
Take the $ 100,000 investor who sold when the market fell 18% when the Covid-19 offensive began to shock markets.
According to Jackson, if they had returned six months later, they would have just broken down even last week. But if they had kept the course, they would have had about $ 125,000 today.
Admittedly, the recent market crash may have been difficult for investors after last year’s low volatility, where the maximum decline was around 5%.
But the usual decline is typically about 14%, Jackson said, which means turbulence in the markets is now normal.
Investors may also perceive that from an economic point of view there are now many positives, including high labor demand and low risk of recession in the short term.
But as the forecast for 12-18 months from now on will be more cloudy, volatility and market sales have increased, Jackson said.
While it may be attractive to keep more cash in your portfolio, this is not a perfect move as inflation is expected to exceed 5% this year and 3% next year.
“Cash will continue to pull the portfolio if inflation remains very high,” Jackson said.