Stock market declines can help long-term investors

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But does it make sense to invest in stocks now, she asked?

I explained that I couldn’t advise on buying particular stocks and instead preferred index funds of the type she already owns. These funds eliminate the risk of owning the wrong specific stocks at the wrong time. Index funds that track broad markets have provided ordinary investors with a simple and inexpensive way to capture overall financial market returns since John C. Bogle made them widely available at Vanguard in 1976.

But with the stock market down sharply since the start of this year, and bonds down as well, that doesn’t seem to say much. Despite occasional rallies, the S&P 500 is down almost 18% for the year. Bonds also lost money. My personal portfolio, which includes bonds as well as stocks, lost about 13%.

Ouch! I’m not happy about that.

But I admit that I cannot predict short-term market movements.

Again, no one can do this consistently. Despite all the words written and spoken on the subject, they do not constitute true knowledge.

“Where is the market going tomorrow? We have no idea,” said Savina Rizova, head of research at Dimensional Fund Advisors, an asset management firm, on Tuesday.

Dimensional does not attempt to make short-term bets, she said. Nonetheless, she said, finance suggests what is likely to happen in markets over long periods of 10 or 20 years or more.

“We know from history that expected returns on stocks are higher than treasuries or cash,” she said. Since daily returns are unpredictable, if you try to enter and exit the market at the perfect time, you may miss some of the biggest days in the market. They can occur at any time, even during long periods of decline.

Dimensional examined the S&P 500 from January 1, 1990 through December 2020. It found that $1,000 invested in the index produced these returns:

  • $20,451 if fully invested for the whole period.

  • $18,329, if you missed the best day in those 31 years, an 11.6% gain on October 13, 2008.

  • $12,917, if you missed the best five days.

  • $7,080, if you missed the best 15 days.

  • $4,376, if you missed the best 25 days.

Based on numbers like these, Ms. Rizova said, it makes sense to roll some money into the stock market as soon as possible. “You could miss a big day, and if you miss them, you miss a lot of benefits,” she said.

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