Figure 2.5 Growth of $100,000 Invested in S&P 500 for 20 Years

      SOURCE: Analysis by Brian Perry. Returns provided by JP Morgan Asset Management with data from Bloomberg; time frame 1998–2017.

      What do you think? Would an extra $370,000 one way or the other have an impact on the quality of your retirement? Again, keep in mind that Jane and Tarzan had the same time horizon and invested in exactly the same thing. The only difference was that Jane stayed the course and Tarzan did not.

Does Crisis Equal Opportunity?

      Let me ask you a question: When do you think the best trading days have occurred? Have they been during robust bull markets as stocks powered ahead? Did those magic days come following great economic news or reports of strong corporate profits?

No, they did not. In fact, most of the best days have followed sharp declines. Take a look at Figure 2.6.

That list shows the 11 best trading days in the history of the S&P 500, as measured by percentage gain. Six of those days came during the Great Depression. Two of them happened during the global financial crisis. Two more happened during the depths of the COVID-19 pandemic. And the only date that fell outside of some of the worst economic periods of the past century came immediately following Black Monday. As a reminder, Black Monday represented the most cataclysmic drop financial markets have experienced, with major market averages down more than 20%. The important takeaway is that every single one of the 11 best trading days occurred precisely when the average market timer was perhaps most likely to be sitting on the sidelines.

Figure 2.6 S&P 500 Largest Single-Day Percentage Gains

      SOURCE: Analysis by Brian Perry. Data courtesy of S&P Dow Jones Indices LLC.

      And that brings me to another point. I've heard many people (presumably non-Chinese speakers) say that the Chinese use the same written character for both crisis and opportunity and that, therefore, “crisis equals opportunity.” In fact, I used this slogan in dozens of presentations over the years before discovering that it is in fact not true. Nevertheless, there's merit to the concept so I'm sticking with it, because as investors, crisis can equal opportunity, and bad news can be your best friend.

      When you are in the accumulation phase of your financial life, a crisis and the falling prices it presents allow you to accumulate additional shares while they are “on sale.” In effect, falling markets help you to dollar-cost-average your portfolio, as your (hopefully) systematic contributions to retirement and other investment accounts purchase stocks at reduced prices.

      The concept remains valid once you've retired and entered the distribution phase of your financial life. That is because you should be systematically rebalancing your portfolio during market declines, which means that you'll be selling assets that haven't fallen too much in value and using those proceeds to purchase additional amounts of the most beaten down assets. This is another form of dollar cost averaging, and although adhering to this discipline requires a level of mental fortitude, the results can be worth it, because the more stocks you can buy “on sale,” the better off you'll ultimately be. And keep in mind that, even in retirement, many of your assets are ultimately earmarked not for next month or next year but rather for a decade or more into the future.

So, the next time there's blood in the streets and markets are in free-fall, try to take a deep breath, relax, and systematically rebalance your portfolio. Because individuals who do that, while staying the course with their stock exposure, ultimately have far better odds of meeting their financial goals than people who move in and out of the markets based upon recent price action.

      Sadly, many people lack the discipline to set and follow an appropriate strategy, so let me repeat myself one more time: don't swim against the tide. Be disciplined. Let the long-term upward trend of markets propel you to your financial goals.

      Or, instead, you could try to successfully trade based upon forecasts of what the future holds. So now let's shift our attention and take a closer look at how well that strategy has historically paid off.