Stay in Your Seat
INVESTINGFOMO is real.
Even when it’s time to dip out and take a break, you’re afraid you’ll miss out on something important.
As March Madness gets under way, many fans will be glued to their televisions in hope of not missing a moment of the action. Recording live television helps, but many of us still remember life before VCRs, DVRs, and on-demand viewing. We knew it paid to stay in your seat until the very end. The same should be said about investing in the stock market.
News outlets and some financial professionals make their living by ringing the panic alarm or giving you FOMO about not going all in because “everyone is doing it.” Guessing during market swings is an investment strategy. But should it be yours?
The above chart reminds us that missing just a handful of days in the stock market can significantly impact your portfolio long-term. This phenomenon––missed opportunity cost––is the kind of FOMO you don’t want.
Here are 5 ways in which missing positive days can affect your long-term results:
1. Compounding—This effect occurs when your investment earnings generate additional earnings over time. Even minor gains on an initial investment can grow substantially through compounding. Missing positive market gains means missing out on your opportunity for an accelerated compound growth rate.
2. Larger Impact of Losses—Gains and losses are not linear. One strong market day can offset a couple of losses. And if you miss out on those uptick days, the impact of any experienced losses may be more pronounced throughout your portfolio.
3. Statistical Significance—Many of the market’s best-performing days tend to cluster around periods of high volatility and often follow sharp declines. Missing just a few of these days can disproportionately affect overall returns. Data reminds us markets are resilient and many times have their largest gains following sharp declines.
4. Long-Term Underperformance—Consistently missing positive days could lead to underperformance relative to a benchmark or the broader market index. Over a long investment journey, these missed opportunities cluster and contribute to a notable difference in your portfolio.
5. Emotional Impact—Emotions are liars––seriously, they are. And when you adopt and fuel emotional reactions, that behavioral bias can affect investment decisions. Frustration and regret are two emotions you don’t want to feel later when your future wealth could’ve looked so much different by not being reactionary.
It’s important to note that it’s virtually impossible to consistently time the market and capture all the best-performing days while avoiding the worst ones. Market timing is fraught with challenges, and attempting it can increase the risk of making poor investment decisions.
Here’s the key takeaway I want you to leave with today: Long-term investing and staying disciplined in your investment strategy—or staying in your seat—tends to yield better results over time. While market volatility and short-term fluctuations are inevitable, the historical trend of the stock market has been upward. That’s why working with a financial advisor like Buttonwood Wealth keeps you focused while navigating challenges to refine your investment strategy and achieve your objectives.