Staying Disciplined Amid Uncertainty

Most investors know buying low and selling high is a central tenet to most successful investment philosophies, yet the majority of investors do the exact opposite when faced with uncertainty and fear-invoking headlines. This fact is not at all surprising — humans are neurologically wired to be horrible investors.

Consider 2020: after hitting all-time highs in February, the S&P 500 plunged as the seriousness of COVID-19 became apparent and many investors fled to cash. There was a near-perfect correlation between market declines and inflows to cash throughout the year, with inflows to cash peaking during the absolute market bottom in March.

The majority of that cash was not re-invested until the market had already rallied nearly 20%. Investors that fled to cash and missed a material part of the rally permanently impaired their lifetime returns.

The opportunity cost was stark. In weeks that saw net inflows to cash, the S&P 500 returned 41.49% on average; in weeks that saw net outflows to cash, it returned 14.22%. In other words, a massive amount of money was sitting on the sideline during the most rewarding parts of the year.

There are always reasons not to invest (especially in 2020!), however markets have always rewarded long-term, disciplined investors. Now is a great time to reassess your investment strategy and make sure it’s one you can stick with in good times and bad.

Source: Avantis Investors. Money market flow data from the Investment Company Institute. Index returns from Bloomberg.