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Why Waiting for a Market Rebound Could Cost You

There’s nothing like a stock market correction to scare off investors.

That was certainly the case late last year, when a series of stock market drops triggered panic selling at a record pace.1 But those who fled for the safety of cash may have done more harm than good. “The problem with selling when the market takes a dive is that by the time you act, the worst may already be behind you,” says Mark Riepe, head of the Schwab Center for Financial Research.

The risk here is double-edged: If you sell during a slump, you could lock in your losses. And if you’re sitting on the sidelines, you may also miss out. Analysts at the Schwab Center for Financial Research studied the five periods since 1970 when stocks—as measured by the S&P 500® Total Return Index—fell 20% or more. They found stocks generated their biggest gains in the first 12 months of the recovery, and that missing even the first month of gains after the market hit bottom led to substantially lower returns over time (see “The early bird gets the return,” below).

 

The early bird gets the return

Waiting to jump back into the market even a month after it hits bottom can lead to significantly lower gains over time.

 

Cumulative returns following market bottom

 

1 year later

2 years later

3 years later

Stayed fully invested through bear market

46%

70%

83%

Moved investments into cash for 1 month

29%

46%

57%

Moved investments into cash for 3 months

20%

41%

50%

Moved investments into cash for 6 months

13%

32%

42%

Source: Schwab Center for Financial Research and Morningstar. Data from 01/1970 through 12/2017. Market returns are represented by the S&P 500 Total Return Index, and cash returns are represented by the total returns of the Ibbotson U.S. 30-Day Treasury Bill Index. Cumulative returns are calculated using the simple average of returns from each period and scenario. Past performance is no guarantee of future results.

 

“As investors, we often wait to make sure it’s safe to go back in the water,” Mark says. “But the idea that you can simply wait for all the positive news to come out and still enjoy robust returns just isn’t true.”

Then again, it needn’t be an all-or-nothing decision. “Consider putting even half your money back to work,” Mark says. “That way, you’re less likely to regret it whether the market goes up or down.”

1Chris Matthews and Sunny Oh, “Investors flee U.S. stock funds at record pace: Lipper,” marketwatch.com, 12/14/2018.

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Important Disclosures:

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Investing involves risk, including loss of principal.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

Indexes are unmanaged, do not incur fees or expenses, and cannot be invested in directly.

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