With the price of oil surging and one of the world’s key oil chokepoints under duress, many investors may have doubts about their investment approach in this volatile environment. Fears of an upcoming recession may cause unease, or a desire to pull out of the market before a supposed upcoming crash. But before an investor makes any changes, it’s important to consider what the evidence says about pulling out of the market during a downturn.
Predicting exactly when a recession will start is difficult, and preemptively pulling out of the market at the wrong time can lead to poor results. For example, many investors braced for a recession in 2022 when the Fed raised rates to combat high inflation. However, the economy proved resilient, and after a difficult 2022, markets went on to post strong double-digit returns over the following three years. For the investors that waited for a clear signal that the markets would stabilize, it was already too late. And even though they can feel longer, Bear Markets are generally much shorter than Bull markets. The average Bear Market lasts 12 months, whereas the average Bull Market lasts 67 months1. But even though market downturns are shorter, 48% of the best days for S&P500 returns in the last 30 years happened during a bear market.
Being wrong about timing might cause you to miss most of the market recovery.
As an example, if you were invested in the S&P 500 over the last 30 years and you missed the 10 best days, your portfolio would be 56% smaller than one that stayed invested the entire time2.. If these upturn days were predictable, that would be great, but they’re nearly impossible to anticipate. Market recoveries do not come with advance notice, and by the time you’re reading headlines about them, most of the gains are already in the rear-view mirror.
Markets have powered through previous oil crises before
As history suggests, markets they tend to come out stronger on the other side of oil crises. In 1973, OPEC’s oil embargo sent shockwaves through the global economy, yet markets recovered and rewarded those who stayed the course. Similar stories played out during the 1979 Iranian Revolution oil shock and the 1990 Kuwait invasion, when prices nearly doubled overnight. In each case, the initial panic gave way to stabilization and eventual growth. This doesn’t guarantee the same outcome today, but it does suggest that reacting to short-term volatility with portfolio changes has rarely been the right call.
When the markets get volatile, it’s natural that investors want to do something to respond to the turbulence around them. Often though, selling off positions just locks in the loses and lack of exposure to the market blunts any gains that would be recovered. Investors who weather the crises and hold on to positions consistently come out ahead of those who don’t. It’s hard to tell when things will stabilize, and an investor who has pulled out of the market may be left in the wrong place at the wrong time.
Staying invested through volatility is a sound strategy for many investors — but it isn’t a silver bullet. Your own personal risk tolerance, time horizon, and financial goals all play a role in determining the right course of action for you. If today’s market environment has you questioning your strategy, that’s a sign you should reach out to one of our advisors. We’ll help make sure your portfolio is still aligned with your long-term plan. Whether that means holding steady, rebalancing, or making a thoughtful adjustment, our advisors are here to help you make the right move for your situation.