As conflict between Russia and Ukraine continues to send shock waves through the markets, many investors may be questioning what, if anything, they should do next.
The most common advice is to stay the course.
That can be difficult on days like Tuesday, when fresh losses prompted both the Dow Jones Industrial Average and the S&P 500 Index to fall deeper into correction territory.
Yet those who held on were greeted with sharp gains on Wednesday that helped both of those indexes break a four-day losing streak.
This is actually a pattern, it turns out. The market’s worst days tend to be followed by its best days, according to research from J.P. Morgan Asset Management.
If you sell when the markets hit the skids, you’ll likely miss the upside.
“We often feel like we can take control of the markets by selling out of them,” said Katherine Roy, chief retirement strategist at J.P. Morgan.
“As a result, you lock in those losses and you really are likely to miss some of those best days that are going to follow very shortly thereafter,” she said.
According to J.P. Morgan’s analysis, the 10 best days over the past 20 years occurred after big declines amid the 2008 financial crisis or the 2020 pullback during the onset of the Covid-19 pandemic.
Had someone invested $10,000 in the S&P 500 on Jan. 1, 2002, they would have a balance of $61,685 if they stayed the course through Dec. 31, 2021.
If instead, they missed the market’s 10 best days during that time, they would have $28,260.
Why having a cash buffer can help
Staying the course may also help retirement savers reach their goals in other ways.
By contributing automatically to your 401(k) through your employer, it gives you the discipline to continue to invest through volatile markets, Roy said.
Additionally, investing enough to get a full employer match — what many call “free money” — can help increase your investment growth.
Retirement savers tend to sabotage that potential growth by taking early withdrawals, which can come with a 10% penalty if you’re under age 59½, in addition to the taxes you will have to pay on the income.
Alternatively, they may take out loans, though many people misunderstand the terms of these deals, which come with their own disadvantages, Roy said. You will lose value by selling shares in order to take the loan and later will have to buy them back as you repay the loan.
If that happens as the market recovers, you may be paying a higher price.
“It’s an additional setback,” Roy said. “If you take out a loan during down markets, you’re losing the number of shares that can help you in that rebound or when those best days do occur.”
One way to avoid to having to dip into your retirement investments is to have a sufficient sum of cash set aside to cover your near-term income needs.
Having that extra cash may help you stay the course during volatile markets, Roy said.
Moreover, other research has shown it may actually make you happier.
