Missing the Biggest Stock Market Rallies: Is It Worth the Agony to Buy-And-Hold?

Getting back to one of the titles mentioned earlier, if you are curious about when the best days in the stock market happen and how it can alter your future, then you should find this article helpful. It’s easy to think that these days occur when stocks are surging higher in a bull market, but is that, in fact, true? It turns out that it is…and it isn’t.

Chances are that your account will be on an upswing in a clear bull market, whatever strategy you are using, be diversified buy-and-hold, technical analysis, fundamentals, etc. It’s a time when many individuals loosen the reins on the rules and opt not to lock in profits along the way, instead choosing to try and increase their returns more dramatically.

Or they may neglect to set protective stops believing they can figure it out and deal with it later when the price weakens. When this downturn inevitably begins to happen and is confirmed on whatever news source an investor tunes into, it is at that moment most people apply risk control measures, like a stop loss order, to protect their money. Unfortunately, by this point, it is often already too late.

I should quickly and steadfastly note that delaying protecting your position and capital is NEVER a good idea. It is ALWAYS better to make the first thing you do after entering a position is to set a protective stop and control your risk. Bad things happen, and they generally happen fast in the markets. It could be very costly if you are not around to exit a position.

In a bear market, the answer is not so cut and dry. For example, let’s take a moment to examine the following finding:

“About 42% of the S&P 500 Index’s strongest days in the last 20 years occurred during a bear market. Another 34% of the market’s best days took place in the first two months of a bull market—before it was clear a bull market had begun.”

Source: Ned Davis Research, cited by Hartford Funds

An investor weathering the storm brought on by the buy-and-hold strategy during a bear market will likely cling to these big rally days as though it were a life-saving ring. As I see it, though, the problem is that the life ring is not attached to anything. There is no dock, there is no ship, there is no land, and there is no one to pull you to safety. There is just you, bobbing away.

Will you stay in that environment forever? It is unlikely. If you can hold on long enough, the tide will eventually turn, and the stock market will turn bullish again. Your accounts will creep higher, and the day will come when you celebrate breaking even. Time will pass, and you will hit new high watermarks and think, ‘Let the good times roll’! The memories of financial ruin, desperation, fear, stress, and anxiety will fade, and the cycle will begin again.

It sounds like a fun rollercoaster ride, doesn’t it? The reality is that I believe the industry brainwashes investors, and they all have Stockholm Syndrome. But I won’t get into it here.

Let’s take a few minutes to dig deeper into the quote above to see if holding stocks during those big rally days during a bear market is worth holding on to. Given the fact that 76% of the strongest days in the stock market occur within bear markets and during the early Stage 1 bottoming phase, it should be the first red flag that what the financial industry preaches may not be the holy grail strategy they say it is.

Think about it. During a bear market, when prices fall 1-5% per week over many months, who cares if there is a 5 – 10% rally in the price of stocks if the price is still lower than before the bear market started? You are still losing money, and all those short-term rallies do is give panicked investors false hope that the market has bottomed and is starting a new bull market.

The same can be said for how the industry claims dividend reinvesting is a great low-risk method to build wealth. Again, nothing could be further from the truth. If an asset price plummets by 30%, will a 2% dividend payout make you feel richer? Does it make up for the huge decline in your life savings when you need it the most? Dividend stock investing is how you achieve status quo returns.

I want to take a moment to walk you through an actual investment scenario. For this example, I will assume that a $1,000,000 account was invested in a diversified portfolio of assets that tracked the performance of the S&P 500 index. The investor used the buy-and-hold strategy through the market peak of the Dot-Com peak and held through to the break-even recovery level many years later.

The Dot-Com crash began in March 2000 and lasted until October 2002. During this period, the S&P 500 index fell by approximately 49% from its peak to its bottom. In this case, the S&P 500 index did not return to its March 2000 peak until September 2007, approximately seven years later.

Assuming the same account and portfolio data from above, investors had one month, ONE MONTH, to celebrate returning to their previous account high of $1,000,000 before the bottom dropped out again. This time, the S&P 500 index dropped approximately 57% from its peak in October 2007 (a loss of $570,000) to its bottom in March 2009. This time the market didn’t fully recover to its pre-crisis levels until March 2013.

Unless you were one of the fortunate few who chose a different approach in September or October of 2007 and moved to cash or used a strategy to profit from the declining market, it took 13 years to break even. A 13-year drawdown is beyond painful – it is life-altering and nothing short of a nightmare for a retiree.

As a brief aside – if you are unsure what a drawdown is, I have been shocked to learn that many active investors do not understand. There are two types of drawdowns that you need to be aware of.

Fast forward to today, in the volatile Stage 3 topping phase market phase we are navigating, the peak we experienced in 2022 may not be reached again for 3, 7, or 13+ years. Capital protection and asset management are a must for investors for the next several years…unless you like afore mentioned roller coasters.

During that 13-year nightmare, there were some big rally days in the market, and the financial industry had us believing this was a cause for hope if not celebration. None of them mattered because they all happened when the investments were already at a loss. The only time missing big rally days makes you fall behind a little is during a raging bull market when stock indexes are making new all-time highs. Those are the real growth rallies.

In short, all these bear market rally days did, was offer a glimpse of hope when there was nothing to support or sustain it. They served as a rallying cry to ‘hold on, and things will get better’ and then fizzled away to account for not much more than that. Did the buy-and-hold strategy work? Sure, but it took roughly 4,700 days to do so. If you are in retirement, that is a very long time to wait for income and growth…and a very long time to live in fear, stress, and anxiety.

Written By: Chris Vermeulen