The case for staying invested
Take a look at this chart. This is the weekly price of an S&P 500 fund, going back to the start of 2012. What do you notice?
Yes, it's been a great decade for stocks, even with the recent volatility. I'd also direct your attention to the many dips and zig-zags along the way. Even though an investor would have grown their money by roughly 4-fold, it hasn't been a smooth ride. Volatility is typical, despite what various news channels and "influencers" would have you believe.
Yet, you'll also notice this chart goes mostly up and to the right, with some of the sharpest upward spikes coming from the depths of a downturn.
Most importantly, look at the tips of those spikes downward. How often does the index return to that level again?
In 2014, for instance, you see a downturn, and the market returns to that level in 2015, and again in 2016. But what happens after that? The market runs away, up and to the right, never to return to those depths again. In less than 2 years the market was higher.
You can apply that same truth to really any point in the market. Though in 2016 the market was making new highs, it never revisited those levels thereafter.
A similar pattern plays out in 2018 through 2020. Even from the peak in 2018, the market was higher by that same time in 2020 (despite Covid).
Of course, remember that stocks are a long-term investment and can take longer to recover than this. The last decade was unusually good for stocks. As a rule, though, as more time passes, the market is less likely to return to its prior lows. This means that sitting out of the market is a bet that gets worse over time. The odds turn against you, and the penalty of losing rises as well.
Why does that matter? Well, to some degree, there's only so much upside to be had. Everywhere the chart is black, is upside. So if you chopped out all those black lines, and stacked them together, you'll see that there's only so much upside to be had.
Furthermore, when you miss a chunk of upside, you don't always get the chance to make it back up again. That low in 2016 was an amazing buying opportunity, even if it didn't feel like it at the time. Investors were also rewarded for buying new market highs in 2016.
In the short term, we don't know how the market will perform. It's messy and unpredictable. However, when we focus on the longer term, our odds are increasingly favorable.
As an investor, you essentially have two options. One is to be very concerned about avoiding short-term drops. Rather than accept these as a normal feature of markets, you instead worry constantly about whether you should be out of the market. Even in a bear market, temporary though they are, you will never know whether you should wait a little longer to get back in. This path is agonizing, and by the way, you'll likely make less money this way, because you're spending more time out of the market. You run the risk of missing out on that scarce, precious upside, and you tilt the scales against yourself.
Your second option is a lot better, I think. You decide that you would rather let time work in your favor. Rather than trying to make a million decisions, always focusing on short-term consequences and temporary declines, you get to relax a bit. Market declines don't have to mean anything except that the market is more likely to be higher in the future. You can say to yourself, "the odds are increasingly good that today's portfolio value is the lowest I will see during my lifetime" (ignoring withdrawals and distributions, anyway). "There is more upside to capture today than there was before this decline." Rather than sell, you instead aim to do the rational thing, and either sit tight or rebalance your portfolio back towards stocks.
But finally, I would be remiss if I didn't also discuss the importance of balance. Any good strategy or principle can be corrupted when carried to extremes. For a retiree, it probably doesn't make sense to keep everything 100% invested in stocks. When you're living on money from the portfolio, you need to make sure that you have enough safe, liquid assets to tide you over until the market recovers. You don't want to be selling stocks when they are depressed. The right balance for you depends on your situation, and that's what financial planning helps clarify.