A frequent challenge investors often face in turbulent markets is to stay disciplined.
When the stock market begins to decline rapidly, fears of financial collapse replaces the cool rational logic that accompanied us when markets were calm. Stock market rebounds arrive when we least expect them. Being out of the market at the wrong time can harm long-term investment performance.
We've seen many tough stock markets over the decades. History has shown a tendency for bear markets to recover within the following one to five years after a significant economic event.
The accompanying chart provides the following examples based on a hypothetical 60% stock, 40% bond portfolio: The Lehman Brothers bankruptcy in late 2008 was followed by a 6% return within one year . The Dot-Com crash in March 2000 was accompanied by a 55% rise after five years. The stock market crash of 1987 was followed by a 21% gain after one year and a 61% return after five years.
In tough markets, we believe investors do better by keeping a long-term focus and remaining uninfluenced by headlines and current events.