If you left the market, don’t wait to get back in

There are only a few basic rules of investing: diversify, keep your costs low and probably most important, hang on when markets tumble occasionally. The last one is the trickiest. It’s not easy watching money vanish as the market plunges, particularly when many people, some of them highly respected, are carping about the end of the world, which invariably accompanies a market collapse.
So it was when Covid-19 sent US stocks into a tailspin in late February. The S&P 500 Index shed a third of its value in just more than four weeks, one of the steepest retreats on record, amid widespread chatter that the pandemic would plunge the US into a long depression, wiping out whole industries and permanently damaging broad swaths of the economy.
Hanging on to stocks through that chaos was no small feat, and amazingly, most investors managed to do it. Research firm Dalbar, which attempts to track investors’ moves into and out of mutual funds, concluded in a recent report that “the average investor’s appetite for equities has remained unchanged throughout the Covid crisis.” Vanguard Group, which oversees more than $6 trillion in assets, found that less than 0.5% of its retail clients and self-directed investors in its retirement plans panicked and moved to all cash between February 19, the market’s pre-coronavirus peak, and May 31.
That’s a big change from previous meltdowns, most recently the 2008 financial crisis, when investors dumped stocks in droves. It seems to have finally sunk in that all crises pass and that the stock market eventually recovers, no matter how desperate things seem at the time.
And true to form, the market recovered sooner than anyone expected. It shot higher in late March and surpassed its pre-Covid high in August, even as the coronavirus showed few signs of slowing. As it turned out, the recovery began roughly eight months before news arrived that a highly effective vaccine is in hand and will start to be distributed soon. That sounds about right.
Those who dumped their stocks along the way, gambling that the market is poised for a long slump and would give them an opening to reenter at even lower prices, now face a hard choice. The market is up roughly 60% from its March low, so getting back in means coming to terms with a costly mistake. Say you had $100,000 in the market at the pre-coronavirus peak and sold roughly halfway down, recovering about $83,000.
—Bloomberg