🍨 Daily Scoop: Missing A Few Days | Trade Stocks

Missing A Few Days

By Mon, Mar 23, 2020

Hello Scoopers,

The stock futures dropped on Sunday evening as the Congress failed to agree on the White House proposed stimulus package. The stock market will likely go down a few percentages again during the week. Now what? — more on that in the “Overall Market” section.

As we go through such a period of stock market volatility, everyone has advice for you. From experts and media to fellow investors and friends and family, the advice ranges from jump ship and save the last bit of cash you can on the sidelines all the way to double down and invest while the crash lasts. Which one of those two opposite sides is right?

In this edition of The Daily Scoop, we go through the pros and cons of sitting on the sideline while the crash runs its due course and dig deep into the difference it can make for your portfolio if you miss a few days of the market recovery instead of staying invested — scroll down to read more.

But first, here is a recap of what happened in the market on Friday:

Market Recap

  • U.S. markets: Friday marked the end of one of the most volatile weeks in recent stock market history. As expected, all three indices ended in the red. Scroll down to the “Overall Market” section to read more.
  • Cryptocurrency: There was a slight recovery in the Bitcoin’s price compared to the last week. However, with 51 days left until the so-called halving of Bitcoin, cryptocurrency traders can’t agree on the direction of the market, hence volatility remains.

 

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This Time Is No Different.

What does history say?

On Sunday evening, the futures market hit a bottom limit one more time as the White House proposed stimulus package didn’t get approved by the Congress. The volatility is not over yet as the government and regulators work through a trillion-dollar economic rescue package.

If history is any guide, it takes time for volatility to subside. For example, between September and December of 2008, the stock market dropped more than 5% in 8 different days:

  • September 29th, 2008: -8%
  • October 7th, 2008: -6%
  • October 9th, 2008: -8%
  • October 15th, 2008: -9%
  • October 22nd, 2008: -6%
  • November 19th, 2008: -6%
  • November 20th, 2008: -7%
  • December 1st, 2008: -8%

Similarly, in 2020, we are likely going to see more days with a rapid decline in the stock market before we see any stability. Of course, 2008 was scary. At least eight scary days with more than a 5% decline were spread across the last four months of the year. However, in hindsight and despite scary times, both the economy and the stock market recovered. The Covid-19 crash will not be any different. We will see more volatile days and the market and the economy will recover.

 


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The Most Common Advice

Jump Ship, And Sit On The Sideline.

What does this mean?

The advocates of the “jump ship and sit on the sideline” strategy believe that the current stock market crash is different from its predecessors. This time, because there is no obvious end to the global coronavirus pandemic, the worst is yet to come. That’s why the best strategy to follow is to jump ship, take your money out of the market and sit on the sideline until things go back to normal.

Why is it a good strategy?

There are merits to this advice. The most important advantage of following this strategy is that you sleep better at night. You’ll stay away from the market, and have one less thing to worry about. It also adds certainty to your life in this uncertain time. You’ll clearly know how much cash you have, and you can plan according to what you have.

Why is it a bad strategy?

The biggest drawback of this approach is that you may miss a big recovery. In the short-term, the stock market is a magnifier of the overall sentiment of society. Even if it takes time for the economy to recover, if a government stimulus goes through, or if we hear about possible coronavirus treatment, the jump in the market mood may result in one of the best “v-shape” recoveries in the stock market. Sitting on the sidelines means that you would miss such v-shape recovery.

What does history say?

If you’ve been a Scooper for a while, you’d know that the editorial team at the Daily Scoop are history nerds. We believe in the rhythms of the stock market, and we always look into the market’s history in search of answers. This time is no different, either.

What happens if you miss a few best days of the stock market?

According to a study reported by Fidelity, during January of 1980 to December of 2018, investors who stayed out of the market and missed 50 best days of the stock market in those few decades ended up underperforming the investors who stayed invested at all times by a factor of 11 times.

(Source: Fidelity)

Final Takeaway

The stock market is a game of extremes. Missing a few best days of the market, that are likely to come after a period of rapid decline, costs investors significantly. Staying invested costs you in emotional uncertainties. However, historically speaking, the odds are in favor of those who stay invested and do not sit on the sidelines.

That’s a wrap on this deep-dive weekend analysis. Let us know whether you enjoyed this analysis or was it too nerdy. Would you like to read similar analyses in the future, or you’d rather other formats. Our email address is members@tradestocks.com. Or, reply to this email.

About the Author

Brought to you by Hoda Mehr, Editor at Trade Stocks, CEO and Co-founder of Stock Card and the host of Renegade Investors podcast. She runs a community of 8,000 stock market investors and manages Stock Card's successful flagship portfolio, Roll with Our CEO, on Stock Card Portfolio Store. Hoda is an Economist with an MBA from Concordia, John Molson School of Business. She applies behavioral economics, data journalism and storytelling to all aspects of her work. Subscribe for free here: Stockcard.io