The Benefits Of Staying Invested

The Cushion Effect

Most investors will be familiar with the concept that it is “time in the market, not timing the market” that generates solid long-term returns. But, many find it hard to stay the course when performance worsens, resulting in a detrimental outcome for their portfolio.

Take, for example, an investor with a portfolio of stocks and bonds worth $100,000 at the start of 2006. For approximately 18 months, she would have been pleased as her portfolio grew to more than $111,000. However, her outlook would have changed when markets began to turn in mid-2007.

How she chose to respond at this point in time would have had a big impact on her investment results. Here are two scenarios:

    1. Our investor holds her nerve for about a year before selling out when her portfolio drops to around $90,000. While sitting on the sidelines waiting for a recovery, she fails to pick the start of the upswing and ends up reinvesting her $90,000 late in the rally. By mid-2010, her holding has recovered to around $93,000.

    2. Our investor holds her nerve through the entire period and never sells down her stock. By the time mid-2010 rolls around, her holding has recovered back to its former high of $111,000.


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When markets are volatile and performance is weak, investors who hold their nerve may recover their losses more quickly than those who sell out and try to time their re-entry.

Disclosures

Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Equities may decline in value due to both real and perceived general market, economic and industry conditions.

Hypothetical and simulated examples have many inherent limitations and are generally prepared with the benefit of hindsight. There are frequently sharp differences between simulated results and the actual results. There are numerous factors related to the markets in general or the implementation of any specific investment strategy, which cannot be fully accounted for in the preparation of simulated results and all of which can adversely affect actual results. No guarantee is being made that the stated results will be achieved.

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.