A week ago, Russia invaded Ukraine and global stock markets have fluctuated, given the uncertainty of what this action will mean for investors. The S&P 500 had entered correction territory, with this index down over 10% from recent highs. Although this political move represents uncharted territory, we can look to prior periods to provide some context for how to manage portfolios.
Future (unknown) actions in this current conflict are expected to influence where financial markets go from here. Because we haven’t seen a world power make such a bold move in recent years, it is very difficult to predict how the markets will react as the situation unfolds.
As long-term investors, we continue to believe the best path forward is to remain disciplined in our investment plans, as it is very difficult, if not impossible, to accurately predict the timing, depth, and duration, of future market downturns. Conversely, market upturns are equally as difficult to predict.
One way to examine this issue is to look at the effect of missing out on trading days. This can happen if an investor chooses to abandon their investment plans to hopefully avoid downturns. However, missing out on strong trading days can influence your long-term results, and this can be seen in the following example, using past market results. Sometimes these strong trading days may occur even when the future is most uncertain.
For this example, we calculate the daily returns of the S&P 500 index from 12/31/1971 to 12/31/2021 (fifty years) and approximate how much a $100,000 investment in the index may have grown over that time. Of course, you cannot invest directly in the index, but it gives us an idea of the effect of missing individual trading days if you were to try to “time the market.”
This period included the following market downturns:
Oil Crisis of 1973 – 1975
The Recession of 1980
Market Downturn of 1981 – 1982
Gulf War of 1990
Tech Boom and Bust of 2001
Global Financial Crisis 2008 – 2009
This fifty-year timeframe covers over 18,000 possible trading days and many global events. As can be seen in the chart, an investor who “stayed the course” over this time frame, capturing the daily returns of the S&P 500, we calculate their initial $100k investment would have grown to a whopping $4.7mm valuation.
By just omitting the best trading day during this period, which occurred during October of 2008 amidst the “Great Recession,”, the ending valuation would have dropped by over $450k. This is due to the effects of compounding returns over time. When we expand our example and omit the just 5 top trading days over that period, the ending value drops over $1.7mm. As we pull out more top trading days, the results become more pronounced.
In this hypothetical example, it is important to acknowledge there are rarely “clues” for investors indicating when these “best” trading days will occur ahead of time. Of course, the exercise looks similar if investors avoid the worst trading days, but these days are also not highlighted beforehand.
Unfortunately, no one knows how this current political situation will conclude and what short-term and long-term effects it will have on the market. During this period, there is always the “allure” of exiting the markets and waiting till there is more clarity. At the same time, since market timing can cause you to miss top trading days, we continue to believe the strategy of “staying the course” should reward long-term investors.
Disclosure:
Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. In US dollars. For illustrative purposes. The missed best day(s) examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best day(s), held cash for the missed best day(s), and reinvested the entire portfolio in the S&P 500 Index at the end of the missed best day(s). Annualized returns for the missed best day(s) were calculated by substituting actual returns for the missed best day(s) with zero. S&P data © 2021 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Investing risks include loss of principal and fluctuating value. There is no guarantee an investment strategy will be successful.
Additional Resources
In addition to our own writing, we also wanted to share additional resources surrounding the Russia-Ukraine War we thought you might find helpful:
Vanguard - Ukraine and the Changing Market Environment - An analysis depicting how markets have performed 6 months and 1 year after historical geopolitical conflicts.
YouTube - Why Russia Is Invading Ukraine - An overview video for trying to understand the possible causes of the current conflict.