Don't Abandon Ship: Why Attempting to Flee Volatility Is a Poor Strategy
One of the most intriguing mysteries of the sea is the phenomenon of ghost ships. These aren't spectral crafts that haunt the waves, but rather fully intact boats that are found completely abandoned.
Among the most famous (and baffling) of these is the Mary Celeste.1 In November of 1872 the vessel set out from New York with ten people aboard on a routine voyage to Genoa, Italy. A month later it was found drifting off the coast of Portugal. Eerily, everything on the ship was intact and in working order. In fact, when the passengers and crew deserted the ship, they left everything behind, including the captain's log.
Over the next 130 years, many speculated on what had happened, including Arthur Conan Doyle (author of the Sherlock Holmes mysteries).
In 2002, researchers used log entries and oceanographic data to reconstruct the most plausible scenario. The captain had misidentified his location, and apparently, faced with high winds and rough seas, thought the ship was sinking. He ordered an immediate evacuation to the lifeboat and abandoned the Mary Celeste.
Sadly, that was the wrong decision. If he had just ridden out the storm, everyone would have been saved.
Greg Iacurci, who reports on finance for CNBC, notes a similar phenomenon among investors.2
"Consider this common scenario," he writes. "The stock market hits a rough patch and skittish investors bail and park their money on the sidelines, thinking it a 'safer' way to ride out the storm."
The problem with this strategy, as Iacurci points out, is that it can cause investors to miss out on the market's best days, which often occur immediately after a correction.
According to analysis by the Wells Fargo Investment Institute, over the past three decades the S&P 500 index has had an average annual return of about 8%. Using a hypothetical example over that 30-year period, if an investor had missed only 10 of those days, they would have earned an average of 5.26% return.
If they'd missed 30 best days (just one per year), their average gains would be reduced to 1.83%.
The analysts concluded, "Missing a handful of the best days over long time periods can drastically reduce the average annual return an investor could gain just by holding on to their equity investments during sell-offs."
Nobody likes volatility. Seeing your hard-earned portfolio drop in value, even for a few days, causes some very unpleasant emotions. However, if you can remember that these rough seas are something you should expect on your long-term financial voyage, you'll be less likely to make the same mistake as the captain of the Mary Celeste.
For ways to prepare strategically and emotionally for the market volatility that's sure to come, talk with your trusted advisor.
Sources:
1. http://go.pardot.com/e/91522/ghost-ships/95bhy4/2397013722/h/7LCP_WYVugSeHkkaEn1BI0zUiISmYQbMB5M1umMDPeE
2. http://go.pardot.com/e/91522/ly-a-losers-game-cfp-says-html/95bhy7/2397013722/h/7LCP_WYVugSeHkkaEn1BI0zUiISmYQbMB5M1umMDPeE
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