On the last day of November central banks around the globe announced a joint effort to help stem a potential global financial crisis by making it more inexpensive for European banks and other banks around the globe to borrow U.S. dollars. Markets jumped on the news, posting the best daily performance since the credit crisis with the S&P gaining 4.4% and international stocks jumping 5.2%.
For investors remaining true to their equity target allocation it was a welcome sign. However, for those that decided to jump out of the equity markets in an effort to avoid losses, it represents a missed opportunity.
Stock performance can snap back quickly. Often the first few days of a rally are the biggest and if an investor gets in after missing those days they will only a see a fraction of the positive performance. The average annual return for the S&P 500 over the past 30 years has been 8.0%. If investors were not invested in U.S. equities for the five best days over that time period their average annual return drops to 6.5%. If an investor was still not sure the market had really turned the corner and waited a few more days before they invested their performance would have been even weaker. Investors who were not invested in U.S. equities for the ten best days over the past 30 years saw performance of 5.4%. Clearly the risk of missing a rising market has outweighed the need to avoid temporary losses.
If investors want to experience the gains of the stock market they must be willing to accept that there will be volatility along the way. By staying true to their equity allocation they can be assured of capturing the full performance of the equity markets and seeing their investments prosper.
Index Performance November YTD
US Stock (Russell 3000) -0.27% +0.20%
Foreign Stock (FTSE AW ex US) -5.17% -12.54%
Total US Bond Mkt. (BarCap Aggregate) -0.09% +6.67%
Short US Gov. Bonds (BarCap Gov 1-5 Yr) +0.13% +3.02%
Municipal Bonds (BarCap 1-10yr Muni) +0.77% +6.02%
Cash (ML 3Month T-Bill) -0.00% +0.10%