Kenny Rogers revealed his ideas about what to do at the poker table when he sang; “you got to know when hold ‘em, know when to fold ‘em, know when to walk away, and know when to run.”
Roger’s wisdom may ring true for gamblers, but it is much less useful for investors. John C. Bogle’s ideas and approach to investing are more apt to yield positive long-term results.
One of the four “investment giants” of the twentieth century (according to Fortune Magazine), Bogle was a founder of The Vanguard Group and was known for doing well by Main Street.
He had a strong conviction that focusing on the long term was the best approach for individual investors.
Bogle appreciated the classics, and was fond paraphrasing Shakespeare’s MacBeth, asserting: “the daily machinations of the stock market are like a tale told by an idiot, full of sound and fury, signifying nothing.”
He went on to say: “Don’t let all the noise drown out your common sense and your wisdom. Just try not to pay that much attention, because it will have no effect whatsoever, categorically, on your lifetime investment returns.”
During periods such as April, when the ebbs and flows of the financial markets are extreme, it’s important to remember Bogle’s words of wisdom.
In theory, it’s easy to get on board with what Bogle is saying.
In practice, however, it is difficult to “not to pay that much attention” when stock prices are gyrating and when you are witnessing daily declines in your portfolio’s value.
Since April’s mini-panic has subsided, investors may have an easier time considering the following, which support the “hold, don’t fold” principle:
- Large stock market declines are typically closely followed by large stock market rallies.
- Selling during today’s downswing can be detrimental, because it increases the chances that you’ll miss the benefits of tomorrow’s upswing
- Bear markets are infrequent (but not rare) and are typically unpredictable. Preparing for a rough ride in the near-term, while anticipating a smooth ride over the long-term, is a prudent approach.
Below are charts, with additional commentary, that illustrate these points.
Worst Days and Best Days Tend to Cluster Together
This chart shows the worst 50 days and the best 50 days in the stock market from 1997 through 2024, courtesy of Goldman Sachs Asset Management.
Source: Goldman Sachs Asset Management
GSAM says the time between the worst day in a drawdown and the best day of the subsequent recovery is often as little as 2-8 days.
If this chart were to be extended into 2025, early April would have featured prominently, when large company US stocks fell by nearly 5% on 4/3 and 6% on 4/4 – then shot up by 9% on 4/9.
If you’re tempted to sell stocks after a big market decline, keep this chart in mind. If you sell on the downswing, you’re likely to miss the upswing.
The 10 Best Days of Each Year Make All the Difference
Here’s another lens on the good days / bad days concept: since 1990, missing just the ten best trading days each year would have turned the S&P 500’s average positive return of +15.1% into an annual loss of -18.0%, on average.
Source: Goldman Sachs Asset Management
The chart above extends back to 2000, and shows actual annual returns in dark blue, paired with what annual returns would have been if investors missed the ten best trading days of the year.
The lesson: hold through the downs and the ups. Selling when the market is down means you run the risk of missing recoveries, which can be detrimental to your long-term wealth.
As hard as it may be psychologically to persevere when the outlook is gloomy and stock prices are falling, it most often is the right thing to do.
Markets Reward Long-Term Investors
The next two images show that being in the markets for the long haul is the best way to handle volatility, which is a feature of the stock market.
This table, courtesy of Capital Group, maps out the nine largest market declines during the past two decades, and puts what just occurred in April, labeled “Trump Tariff Tremor” into context.
Source: Capital Group
The events in purple font are corrections, where the stock market (S&P 500 Index of large company US stocks) has declined by between 10% to 20%.
Most of the time in instances where the market corrects, the decline is quick and sharp, and stocks recover quickly.
The “Trump Tariff Tremor” in black font a significant event, and the market activity was in line with other corrections. While stocks haven’t fully recovered to their most recent peak, the upswing from the April 8 “bottom” has been 14% as of May 2.
The events in green font are more severe bear markets, where the stock market has declined by more than 20%.
Recovery typically takes some time after the bottom of a bear market is reached. But in both types of down markets – Corrections and Bear Markets – long-term investors are rewarded for staying the course.
The last chart, also courtesy of Capital Group, is a complement to the previous table and shows the path of the S&P 500 Index of large-company US stocks for the past 20 years.
Source: Capital Group
The shaded areas map out the bear markets in green and the corrections in purple.
Through it all, the US stock market return has averaged about 9.25% per year. A $1,000 investment on January 2004, would have appreciated to approximately $5,888 over the twenty-year period.
Hopefully, this data can help you recognize the trees (short-term), enable you to see the forest (long-term), and support your resolve to stay committed to your investment strategy and your financial plan.
-RK