The market has been experiencing some of the wildest times since the financial crisis as the S&P 500 index (^GSPC) fell over 8% after hearing President Donald Trump’s plans to deal with the coronavirus outbreak in the U.S.
This means that the S&P 500 is now more than 25% down from its February highs when the coronavirus was contained to the Wuhan region of China.
Even for the most sensible and even-keeled investor reared on the wisdom of Warren Buffett and Jack Bogle, ignoring Mr. Market – the personified force of daily market action that Buffett’s mentor Benjamin Graham came up with – is really, really hard.
Speaking on Yahoo Finance’s “On The Move,” Kelly Ye, director of research at ETF platform IndexIQ, pointed to three rules for investing in this “very volatile market.”
“The worst thing to do is to panic and it’s time to review some of the most time-tested investment rules,” she said.
1. Never time the market
This is Ye’s rule No. 1.
“The market tends to overreact,” she said and pointed out that reacting to short-term market moves isn’t good long-term thinking.
2. Every crisis is different
“What happened before might not happen this time,” Ye said.
This is especially true when you think about timing the market. Even though every investment prospectus or earnings call cautions about forward-looking statements and notes that past returns are no guarantee of future results, people still look to the past for guidance — sometimes too much.
3. Be diversified
This is the most important rule, Ye said.
“The wider net you cast on your investment opportunities, the better chance you’ll have navigating the market,” she said. Generally, this means being exposed to a wide variety of stocks, like an S&P 500 index fund, but also having the proper allocation for your age. For a person about to retire, a mix of stocks and bonds is recommended.
Everyone’s situation is different but here’s an example of how Vanguard’s 2020 retirement target date fund diversifies: 30% total stock market index fund, 29% total bond market index fund, 20% total international stock market index fund, 13% total international bond index fund, and 8% short-term inflation-protected securities.
Ye noted that a lot of investors rush to cash in a time of crisis, but often miss the idea that cash isn’t free.
“There’s always opportunity costs related to cash because you could be missing some returns,” she said.
This plays out in the research: Even missing just the best 10 days of the stock market can kill your gains.
From 1999 to 2018, annualized return of the S&P 500 was 5.62%, but without the 10 best-performing days, your return would drop to 2.01%. Take out the next 10, and your return would sink to -0.33%.
This is especially important, because if you accept that you can’t time the market, staying invested when you’re looking long-term means you won’t miss out on these good moments you can’t predict. At the end of the day, trying to time the market is another way of not being diversified.