Stock Market Declines Can Help Long-term Investors

But does it make sense to invest in stocks now, she asked?

I explained that I couldn’t give advice about buying particular stocks, and instead favor index funds of the kind she already owns. Those funds eliminate the risk of owning the wrong specific stocks at the wrong times. Index funds that track broad markets have provided an easy and inexpensive way for ordinary investors to capture the overall returns of the financial markets since John C. Bogle made them widely available at Vanguard in 1976.

But with the stock market in a broad decline since the beginning of this year, and bonds falling as well, that may not seem to be saying much. Despite occasional rallies, the S&P 500 is down nearly 18 percent for the year. Bonds have lost money, too. My personal portfolio, which includes bonds as well as stocks, has lost about 13 percent.

Ouch! I’m not happy about that.

But I accept that I can’t predict the market’s short-term movements.

Then again, nobody can do that consistently. Despite all the words written and spoken on the subject, they don’t amount to real knowledge.

Lessons from financial history

“Where’s the market going tomorrow? We have no idea,” Savina Rizova, head of research at Dimensional Fund Advisors, an asset management firm, said in an interview Tuesday.

Dimensional does not attempt to make short-term bets, she said. Nonetheless, she said, finance does suggest what is likely to happen in the markets over extended periods of 10 or 20 years or more.

“We know from history that there are higher expected returns from stocks than Treasury bills or cash,” she said. Because day-to-day returns are unpredictable, if you attempt to move in and out of the market at the perfect time, you are likely to miss some of the market’s biggest days. They can occur at any moment, even during long downward periods.

Dimensional looked at the S&P 500 from Jan. 1, 1990, through December 2020. It found that $1,000 invested in the index produced these returns:

• $20,451 if you were fully invested for the entire period.

• $18,329, if you missed the best single day over those 31 years, a gain of 11.6 percent on Oct. 13, 2008.

• $12,917, if you missed the best five days.

• $7,080, if you missed the best 15 days.

• $4,376, if you missed the best 25 days.

Based on numbers like these, Ms. Rizova said, it makes sense to deploy money in the stock market as soon as you can. “You could miss out on a big day, and if you miss those, you’re missed a lot of the upside,” she said.