“Would you have a great empire? Rule over yourself.” So said Roman writer Publilius Syrus two millennia ago. Despite its age, that is wise investment advice now. Many see global stocks’ nearing breakeven for 2020 as cause to sell. They fear another plunge from COVID resurgences, escalating US-China tensions, bumbling politicians or other obvious “risks.” But headline fear fixation obscures the biggest risk you always face: yourself.
The 2020 meltdown froze many investors in place. The upside? Paralysis meant inaction, allowing them to capture some of the rebound. The downside? Many are thawing now—and acting. Desperate to avoid another market sucker punch, they see stocks’ rebound as a perfect exit. It’s “breakevenitis”—the emotional salve of selling after recapturing bear market declines. After all that emotional pain, you aren’t down and can avoid potential repeats. It feels like a win. Feelings are dangerous.
Those who sold or stockpiled cash face a similar challenge—when to get back in. Support for avoiding stocks is everywhere. Headlines herald myriad fears: COVID spikes across America and elsewhere, record-high mortgage delinquencies, massive unemployment. Those fearful of these and more relative to stocks risk falling prey to confirmation bias—the human tendency to see only information supporting their pre-existing views, which I detailed in my June 23 column. The downturn’s emotional scars blind many doubters to contrary evidence.
But avoiding stocks on well-known fears is backward-looking—a classic error. Double-dip fears abound after every bear market. In 2009, double-dip doom included possible hyperinflation, sky-high unemployment and forecasts of a decades-long debt hangover—plus fear of President Obama. Stocks soared. In late 2002 and 2003, sluggish consumer spending, terrorism and the Iraq invasion sparked fear. Stocks endured an early-2003 correction, but the bull market resumed with gusto in March.
Twin plunges are extremely rare. Many claim the global bear markets beginning in 1929 and 1937 constituted a double dip. But nearly five years separated them. The S&P 500 surged 324% in between. Global economies grew. They were fully separate downturns. Regional double dips happen—like America’s early-1980s swoon and Europe’s early-1990s woes. Double-dip fears are routine after bear markets. They’re almost always false.
New bull markets don’t derail easily. Bear markets sink expectations—and stock prices—so low reality is extremely unlikely to disappoint investors. In the 11 global bull markets from 1929 – 2019, the S&P 500 averaged 27.8% returns in the first 180 days. While periodic volatility is normal, the next six months similarly averaged 46.6% 12 months from the low. Crucially, these early gains compound through the bull market’s remainder.
Sometimes selling at breakeven works. In 2007, stocks recaptured the prior bull market’s peak on May 30. The S&P 500 ticked just 2.3% higher before a new bear market began that October. But much more often, acting on breakevenitis sows future regrets. Consider: The S&P 500 erased its 2007 – 2009 bear market declines on March 28, 2013. A year later, it was up 18.4%. Two years later? 33.0%. By the bull market’s end, it was 115.8% above breakeven. Four months after 1990’s bear market ended, it was back at breakeven. That bull market ran nine years, gaining 313.9%.
Hence, despite the ferocious fears bear markets cause, your riskiest move is not owning stocks early in new bull markets. For most investors, reaching long-term goals requires liquid returns only stocks provide. US stocks have returned about 10% annualized since 1925. Investors forget that includes every stomach-churning bear market, every down day—the Great Depression, Black Monday’s -20.5% plunge in 1987, 2008 - 2009’s meltdown, even 2020’s gut-wrenching February and March.
Sidestepping a bear market and re-entering lower boosts returns. But trying and erring—which is what happens to most who try—is disastrous. Consider: A $10,000 investment in the S&P 500 when 1988 began grew to $256,000 by 2019’s end. But missing just the 10 best days of that stretch cut the tally to about $128,000. Miss the 20 best days, and it’s less than $80,000.
This is why most investors should exit or avoid stocks only if they know something terrible others don’t—not because of known fears, which stocks always pre-price. Not because of fear from prior downturns—a backward-looking factor detached from your investment goals.
Reacting to short-term volatility by steering clear of stocks doesn’t automatically reduce risk. It very often increases the risk you don’t reach your investment goals. Good investors don’t fight unpredictable volatility and recurring bear market fears. Nor do they let confirmation bias compound past mistakes as bull markets forge ahead. They accept them as the price of the high returns they require. They heed pioneer investor Ben Graham’s timeless wisdom: “The investor’s chief problem—and even his worst enemy—is likely to be himself.”
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