The Biggest Stock Market Lesson of the Year? Don’t Freak

Stocks have risen a whole lot this year, and not just the TSX and S&P 500, either: stocks globally are up about 21% since January 1, which is well above the 10% or so you’d normally expect. What’s interesting is that these big returns have come despite a lot of scary stuff in the news: conflict in the Middle East, the war in Ukraine, rising tensions in the South China Sea, plus concerns about China’s economic slowdown, inflation perhaps surging again, and the profitability of AI. In other words, there were plenty of moments when it might have seemed smart to hit the eject button to dodge a stock downturn. But doing that would have meant missing out on this year’s healthy returns.

Here’s the thing, though: this year hasn’t been an outlier, spooky-things-wise. The stock market has basically been in one long bull market since 2009. But along the way, there have been hundreds of rational-seeming reasons to get scared and sell your shares, as this chart recently reminded us (you can see part of it below). And the same will surely hold true in the future. But, if you’re a diversified, long-term investor, staying put is almost always the right move, even if the doomsayers are occasionally right, as they’re bound to be sooner or later. Why? Keep scrolling.

Panicking even for a little bit can cost you lots of money.

Why? Because stock gains aren’t evenly distributed. There are often a lot of boring, low-action days (or weeks or months) in a row and then — bam! — a great day will come along and stocks will surge. The trouble is that no one really knows when these red-letter days will appear, but history suggests that you really don’t want to miss them. If you do, your returns will likely be far worse than if you had held your shares through market turbulence. Check out this chart:

THE UPSHOT: We live in a scary world with a lot of unknowns, and markets, now as ever, are volatile. Of course, it would be super if you could accurately predict the future, exit the market right before a big downturn, and then savvily reinvest right as stocks hit their nadir and begin to recover. But that’s really hard to do. Studies have shown that individual investors who panic sell during downturns tend to jump back in after the market has already recovered and risen a bunch, which is a good way to miss out on banner days. That’s why many personal-finance pros suggest doing the most boring thing possible: accept that timing markets is hard, make sure you have enough cash in the bank so you don’t need to sell if markets take a dive, and stick with your plan — even if that means refusing to open your brokerage app for a while.

Written By

Jared Sullivan

Jared Sullivan is an editor for Wealthsimple Magazine and author of the book "Valley So Low: One Lawyer's Fight for Justice in the Wake of America's Great Coal Catastrophe".