This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
There's no way to sugarcoat things. The past few months have been absolutely awful for investors. The S&P 500 Index has plunged a gut-wrenching 18% so far this year. Multitudes of stocks have plummeted even further from their peak. There's no end in sight to the selling, given all the headwinds currently facing the global economy.
Difficult periods like this can make even the most seasoned investors want to throw in the towel and liquidate their portfolios. However, I'd like to encourage you to press through this challenging period. I want to share my investing story and some data to give you some hope that this, too, shall pass.
I learned to invest the hard way
I was only a few years into my investing journey when the Financial Crisis upended the global economy and stock market. Before that event, my experience with stocks was that they went up. That had my confidence swelling to the point of overconfidence.
So I made some really reckless investment decisions as stocks started to crash. I'm lucky that I didn't completely wreck my portfolio. I started buying stocks just because their price went down a lot. I focused on the stock price and not the underlying business. One of the most foolish (and I mean really small "f" foolish) moves was to buy call options on investment bank Lehman Brothers on the firm belief that the government would bail them out. Suffice it to say; I lost a lot of money on that gamble.
As my portfolio dove deeper into the red, accelerated by my ill-timed shift from an investor to a trader, I got to the point in early 2009 where I had to take a break from investing. However, instead of liquidating what remained of my portfolio, I just stopped making changes. I took a month off from buying and selling stocks and reset my strategy.
I learned a few important lessons during this challenging time:
- Forget about the stock price; focus on the business: I stopped buying stocks because they had low price tags and focused on investing in companies that I believed could thrive over the long term.
- Credit is crucial: I started putting more emphasis on a company's balance sheet, focusing on those with investment-grade credit ratings because that gave them more financial flexibility to survive tough times so that they could thrive in the eventual recovery.
- Cash flow is king: This lesson goes hand in hand with having a strong balance sheet. Cash flow gives companies the funds to expand when credit is unavailable.
As tempting as it was to throw in the towel on investing in 2009, I'm so glad I didn't. That challenging period made me a better investor, and my portfolio's value has grown by leaps and bounds over the more than a decade since the Financial Crisis. While, like most investors, the value has fallen quite a bit from the peak of late, I sleep well at night knowing that, for the most part, I own a portfolio filled with several high-quality companies with strong balance sheets and cash flows that will weather this storm and thrive on the other side.
These numbers urge you not to give up
I want to pivot from my story to share an eye-opening chart I recently came across that shows the power of persevering as an investor. When stocks are in freefall, it can make an investor think about liquidating to avoid further damage. However, historically some of the market's best days have come during these periods. Investors who give up on the market could see their returns suffer.
| Decade | Price return of the S&P 500 | Return excluding the 10 best days per decade |
|---|---|---|
| 1930s | (42%) | (79%) |
| 1940s | 35% | (14%) |
| 1950s | 257% | 167% |
| 1960s | 54% | 14% |
| 1970s | 17% | (20%) |
| 1980s | 227% | 108% |
| 1990s | 316% | 186% |
| 2000s | (24%) | (62%) |
| 2010s | 190% | 95% |
| 2020s | 18% | (33%) |
| Since 1930 | 17,715% | 28% |
Data source: CNBC and Bank of America.
The middle column shows the total return earned by investors over decades. Over the long term, investors who kept their money in the market earned a staggering return, despite enduring their share of bear markets. However, if an investor liquidated their portfolio and went to cash, they ran the risk of missing out on some of its best days. They'd earn much lower returns if they were on the sidelines during the 10 best days each decade.
Stay the course
These are definitely challenging days to be an investor. However, please don't give up because they should eventually pass. Instead, use this time to reevaluate your investment strategy so that your portfolio can thrive again when the market eventually recovers.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
