Why Investing Is Hard but Still Worth Doing in Market Downturns

by James Liu, CFA / on May 9, 2022

Perhaps nothing summarizes the investor experience better than the old quote that “nothing worth doing is easy.” The current market environment, as uncomfortable as it may be, serves as a reminder that staying invested is difficult. The very definition of investing involves sacrificing what we could buy and consume today in order to achieve more tomorrow. Over long periods, this is how all investors can transform hard-earned savings into true wealth and financial freedom. What can investors do to focus on the long run when the daily headlines and market swings are alarming?

The tendency to react to what’s happening today at the expense of the next year or decade is a natural one. This is no doubt a challenging time for many investors, both emotionally and financially, especially for those who are either accustomed to or have only experienced the rising markets of the past decade or more.

One of the core principles of investing is that there is no reward without risk. Simply put, having the fortitude to stick it out when times are tough is exactly why long-term investors are rewarded. Occasionally, there may be times when investing seems easy and all prices rise, irrespective of risk, such as over the past two years or during the dot-com boom. When these periods inevitably end, it becomes clear which investors were truly following a disciplined plan and which were just following trends.

In this environment, it’s important to maintain a broader perspective in order to be well positioned when markets do eventually recover. Below are three charts that put this challenging market in context.

1

Major indices have swung wildly this year

All major indices are in correction territory and the Nasdaq is officially in a bear market. This level of volatility, while extreme compared to the past two years, is par for the course when investing in stocks. In fact, the reason stock market investors are rewarded over time is exactly because they are willing to withstand a higher level of risk.

2

Staying invested is the best way to manage challenging markets

While the temptation to react to market events is natural, history shows that simply staying invested is often the better approach. This is because timing the market is hard if not impossible. Big down days are often followed by up days shortly thereafter. Trying to predict these day-to-day swings is unnecessary and often counterproductive.

3

In the long run, fundamentals are what matter

Over the course of years and decades, fundamentals like valuations and earnings matter much more than daily headlines on the Fed, individual stocks, politics and more. The strength of the economy, fueled by business innovation and consumer spending, have propelled the stock market forward cycle after cycle.

The bottom line? Although the market environment is challenging, investors ought to remember that staying invested to achieve financial goals is worth the short-term discomfort.

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