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3 reasons to stay invested right now

Key takeaways

  • Volatility is common, especially in the later part of an economic expansion.
  • Historically, many investors who moved out of stocks during down markets didn't fare as well as those who stayed the course.
  • To help manage volatility, consider whether your stock and bond mix matches your tolerance for risk, and consider adding assets that may offer inflation protection.

When markets are turbulent, investors often wonder whether it might make sense to take some or all of their money out of the market and wait until things calm down.

But while that might seem like a smart move if the markets continue to drop, even a short-term move to the sidelines can hurt your long-term returns and decrease the odds of achieving your financial goals, according to Naveen Malwal, an institutional portfolio manager with Strategic Advisers, LLC. "Historically, we haven't seen a flight to safety pay off," Malwal says. "Despite some challenges investors may see, keeping your assets in cash may be a poor proposition right now." Malwal cites 3 reasons why:

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1. Market volatility is normal

"We believe the US economy is still expanding, but in a mature part of the cycle, where the expansion is occurring at a slower rate," says Malwal. And while market corrections can feel scary, they don't necessarily indicate future losses. In fact, double-digit drops are surprisingly common in the stock market - yet the S&P 500 has historically finished most years with a positive return.1 And as the chart below shows, stocks have historically recovered even from major downturns and delivered long-term gains.

Despite market pullbacks, stocks have risen over the long term

Chart shows rising price of the S&P 500 from 1985 through May 2022, despite 12 major downturns along the way.
Source: Fidelity Investments. Past performance is no guarantee of future returns. See footnote 2 for details.

2. The best returns often happen when everything feels the worst

Counterintuitive as it may seem, some of the best days in the stock market have historically occurred during bear markets. "What we've seen historically is that investors who give themselves a time out of the market very rarely come back in at the right time," says Malwal. "Negative headlines can persist for some time. Investors typically wait for good news and by the time that happens, they've often missed some of the strongest days of market performance." And missing out on those big days can make a significant difference in your long-term return. As the chart below shows, a hypothetical investor who missed just the best 5 days in the market over the past 4 decades could have reduced their long-term gains by 38%; someone who missed the best 10 days could have undermined their gains by 55%.

Missing out on best days can be costly

Hypothetical growth of $10,000 invested in the S&P 500 Index, January 1, 1980–March 31, 20213

Not missing any days would have resulted in $1.09 million. Missing just the 5 best days in the market would drop the total 38% to $676,395. Missing the 50 best days would result in a total of just $77,920.
Past performance is no guarantee of future returns. Source: FMRCo, Asset Allocation Research Team, as of June 30, 2022. See footnote 1 for details.

3. Holding cash may also be risky

With recent interest rate increases, yields on relatively safe accounts like money markets and high-yield savings accounts have risen, making them more attractive to savers. But returns on those accounts may barely keep up with inflation in the long run. For example, if an investor puts $100 into a money market account today that returns 4% annually, it would be worth $104 a year later. But at a 4% inflation rate, goods that cost $100 today will cost $104. "Historically, a diversified mix of stocks and bonds have provided a better chance of outpacing inflation over the long run, versus investing in short term instruments," says Malwal.

A better plan of action

Instead of turning to cash, Malwal suggests several moves that can offer protection and diversification in today's market:

  • Build in some inflation protection. Consider adding some assets that tend to do well in an inflationary environment within managed client accounts, such as commodities and alternatives.
  • Check your bond exposure. Bond prices and yields move in opposite directions. So while rising interest rates tend to depress bond prices, yields have moved higher. 
  • Assess your tolerance for risk. During bull markets it can be tempting to take on additional risk, but a market downturn is a good opportunity to assess whether your asset mix is well aligned with your risk exposure. "Investors who were tempted to take on more risk over the last few years likely experienced more volatility this year than those investors who regularly rebalanced their accounts," says Malwal. "Greater volatility can lead to more stress for some investors, which unfortunately can lead to rash investment decisions." Regularly rebalancing the mix of investments in your accounts can help keep your risk level consistent in different types of markets. That can help take some of the sting out of future periods of market volatility that will inevitably occur.

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1. Bloomberg Finance, L.P., Standard & Poor's as of 12/31/21. 2. The S&P 500® Index is a market capitalization–weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation. S&P and S&P 500 are registered service marks of Standard & Poor's Financial Services LLC. The CBOE Dow Jones Volatility Index is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. You cannot invest directly in an index. 3. The hypothetical example assumes an investment that tracks the returns of the S&P 500® Index and includes dividend reinvestment but does not reflect the impact of taxes, which would lower these figures. There is volatility in the market, and a sale at any point in time could result in a gain or loss. Your own investing experience will differ, including the possibility of loss. You cannot invest directly in an index.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.

Neither asset allocation nor diversification ensures a profit or protects against loss.

  The S&P 500® Index  is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent US equity performance.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.

Stock markets, especially foreign markets are volatile and can decline significantly in response to adverse issuer, political regulatory, market or economic developments.

You could lose money by investing in a money market fund. An investment in a money market fund is not a bank account and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Before investing, always read a money market fund’s prospectus for policies specific to that fund.

The Bloomberg U.S. Aggregate Bond Index is a broad-based, market-value-weighted benchmark that measures the performance of the U.S. dollar-denominated, investment-grade, fixed-rate, taxable bond market. Sectors in the index include Treasuries, government-related and corporate securities, mortgage-backed securities (MBS) - agency fixed-rate and hybrid ARM pass-throughs -asset-backed securities (ABS), and commercial mortgage-backed securities (CMBS). The views expressed in the foregoing commentary are prepared by Strategic Advisers LLC. based on information obtained from sources believed to be reliable but not guaranteed. This commentary is for informational purposes only and is not intended to constitute a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The information and opinions presented are current only as of the date of writing, without regard to the date on which you may access this information. All opinions and estimates are subject to change at any time without notice. This material may not be reproduced or redistributed without the express written permission of Strategic Advisers LLC. Fidelity® Wealth Services provides non-discretionary financial planning and discretionary investment management through one or more Portfolio Advisory Services accounts for a fee. Advisory services offered by Fidelity Personal and Workplace Advisors LLC (FPWA), a registered investment adviser. Discretionary portfolio management services provided by Strategic Advisers LLC (Strategic Advisers), a registered investment adviser. Brokerage services provided by Fidelity Brokerage Services LLC (FBS), and custodial and related services provided by National Financial Services LLC (NFS), each a member NYSE and SIPC. FPWA, Strategic Advisers, FBS, and NFS are Fidelity Investments companies.

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