The Case for Calm: Keep a Long View

Investors were faced with a difficult choice in early 2009. Coming off the most intense stretch of stock market volatility since the 1930s and a major decline in the S&P 500, long-time market maxims were called into serious doubt. “Just be patient. It will come back,” didn’t pack much punch. Buy-and-hold investing felt like a losing strategy.

Bailing out might seem smart when things look grim — after all, things can always get worse. And sometimes, they do ... but often just long enough for hasty sellers to make financially fatal mistakes. Cutting and running early in a bear market can feel safe, like you're getting out before everyone else, but those with itchy fingers on the sell button often learn a harsh lesson about the dangers of market timing.

The S&P 500 notched a generational low on March 9, 2009, several months after the most intense selling pressure. Though the bear market started in October 2007, it was, let’s call it, a “garden-variety” dip for the first 11 months before Lehman Brothers went belly-up in September 2008.

A fascinating twist in early March of 2009 was that the Volatility Index (the “VIX”), or Wall Street’s “fear gauge,” was lower compared to levels it hit in October and November 2008 — a time we most associated with the Great Financial Crisis (GFC).¹ This price action gets to a common theme in markets — if stocks don’t scare you out, they wear you out.

Here’s what that means: Some investors dashed to the sidelines in late 2008 due to extreme volatility and sharp portfolio losses. Some stayed invested. Some held on, but then just couldn’t stomach the daily mounting losses by March of ‘09. For that third group, it wasn’t so much huge daily swings in stocks, but the bear market’s duration that was just too painful.

 

Hindsight is 20/20, I grant you, but as despondency set in, that was the last leg of stocks’ plunge. The S&P 500 hit a low of 666.79 and would go on to return more than 1000% in the ensuing 16 years.² Shares of large US companies left virtually all other asset areas in the dust (we’ll save that discussion for another time). The point here is that keeping a long view worked then. And it works now.

Market timing — the practice of attempting to predict market movements — has been around ever since investors had quick access to their accounts. And for good reason. After all, we are all told to “buy low, sell high.” Even teenagers and young adults are familiar with that phrase. Market timing also has its appeal because, as mentioned earlier, hindsight is clear. We see that the S&P 500 peaked in 2000, 2007, and February 2020. “Oh, just sell there and buy here, and that’s the key to getting rich in stocks.” 

It just doesn’t work. At market peaks, the feeling that stocks can do no wrong permeates investors’ collective psyche. Steady bull markets, strong economic data, and seeing many people in your orbit do well investing makes it tough to sell out for fear of falling out of line with the herd.

There are countless studies on the perils of market timing. Perhaps the most cited is the DALBAR QAIB report. It reveals that over 20 years, the average investor’s return is multiple percentage points annually below what the S&P 500 delivers.³ Other research agrees, including work done by The Vanguard Group and Morningstar, though those companies assert that the so-called “behavior gap” is less, and more like 1–2 percentage points each year.^4,5 Just a couple of points a year doesn’t just add up, though, it compounds (another topic we’ll dig into!).

For some people, it’s normal to get anxious when the stock market declines. Others (maybe the luckier group) don’t seem to care a whit. If you are in the former group, consider these three realities:

1. Volatility Is Normal
   • The S&P 500 averages a 14% drop each year, yet the index has finished positive in 34 of the last 45 years, according to J.P. Morgan Asset Management.⁶ A -20% “bear market” happens every 3–4 years, per BofA (pictured below).
2. Time in the Market Beats Timing the Market
   • Even if you invested everything in October 2007, the pre-GFC high, you’d be up a whopping 400%+ today (through Q1 2025).⁷
3. Emotions and Headlines Are Poor Guides
   • Investors who reacted to headlines and sold out in 2008, 2016, or 2020 likely missed the rapid recoveries that followed.

The Bottom Line: Staying calm amid uncertainty isn't always easy, but it's consistently been rewarded over time. In investing, patience isn't just a virtue — it's a strategy.

Market Declines Are Normal: Frequency of Pullbacks

Source: BofA Global Research