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Liz Looks at: Staying Invested



Came for the Gain, Stayed for the Pain

As markets hit all time highs again and again, it may seem odd to read a column that’s urging investors to stay in it. Who wouldn’t? And haven’t a lot of new investors come on board in the last 18 months? What makes me think I need to convince anyone to stick around in a year when the S&P has returned 20%, and is up 100% since the low in March 2020?

I’m not a new investor, and experience has taught me that a strong return pattern is usually peppered with periods that will test your conviction. If and when your conviction gets tested, here are some things to remember.

Bumps are Common, Bears are Rare

A bear market is defined as a pullback of 20% or more, peak to trough. Typically, we don’t go into bear market territory unless accompanied by a recession. If said recession occurs, that bear market usually turns into a -25% to -40% event. For reference, the bear market that preceded the COVID-19 recession was -34%.

Although recessions are a normal part of the business cycle, they are relatively rare. Which means the more common experience is an expansion, and no bear market. Also common is a pullback of less than 20%, even somewhere in the range of -10-15% in any given year.

The average annual correction (pullback of at least 10%, but less than 20%) is -14.3%, and the average amount of time it takes to recover from it is four months. That may sound painful, but looking at data since 1980, the calendar year return on the S&P 500 has been at least seven percentage points above its largest intra-year decline (even if the year still posted a negative return).

Now, the bear markets we’re trying to protect ourselves against are worse—an average pullback of -35.7% and average recovery time of two years and three months.

Clearly, it’s important to avoid fully participating in a bear market. The point is, we can construct portfolios to protect against those large and rare events while learning to live through the smaller bumps. Because in the end, holding on through a non-bear pullback has paid off.

The Best is Yet to Come

It can be tempting to sell when volatility strikes. Even more tempting if other people are doing it. But guess what happens if you sell into a downturn? You lock in the downturn. Depending on the price you paid for the position, you may lock in a loss. That’s useful for offsetting capital gains on tax day, but not useful for building wealth.

It also messes with the diversification of your portfolio that you worked so hard to put in place. If you worked hard to build a well-balanced portfolio, let it work for you in times of stress.

Lastly, and perhaps most importantly, it prevents you from participating in any bounceback that happens after the pullback.

To put some numbers around it, here’s a hypothetical: if you invested $1,000 in the S&P 500 25 years ago and stayed fully invested the entire time, you would have $5,035 today. Conversely, if you got jittery every time there was a -2% or worse daily decline and exited the market, for just one week each time, you’d have cut that gain by more than half and ended up with only $2,144 today.*

Time is on Your Side

There is power in embracing volatility. There is power in time. And for long-term investors, time is on your side. There is power in protecting against bears while riding the bumpy bull. This bull has been uncharacteristically free from bumps, so this column is here to remind you that if it happens, don’t fight it, ride it.

-Liz Young, Head of Investment Strategy at SoFi

Please Note: Past performance is not a guarantee of future results and an individual investor’s returns may vary over time. Investing comes with risk, including the risk of loss

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Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.
Communication of SoFi Wealth LLC an SEC Registered Investment Adviser
SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.
Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. Liz Young is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Her ADV 2B is available at www.sofi.com/legal/adv.
*Trailing 25 years ending August 24, 2021. Price return only, before transaction costs. Investment returns are compounded over time depending on the days in the market. In this example, the hypothetical investor exited the market the day after a 2% or worse decline and stayed out for one week. Then re-entered until the next 2% or worse decline.
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Liz Young ABOUT Liz Young Liz Young is SoFi's Head of Investment Strategy, responsible for building out the function and providing economic and market insights. Prior to joining SoFi, Liz was the Director of Market Strategy at BNY Mellon Investment Management where she formulated and delivered views on macroeconomic themes and their effects on capital markets. Earlier in her career, she was a due diligence analyst at Robert W. Baird and a research analyst at BMO Global Asset Management. Liz is passionate about educating others on markets and investing in order to help people feel empowered to take a more active role in their financial futures.


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