Broker Check
Losing Patience Leads to Costly Mistakes

Losing Patience Leads to Costly Mistakes

April 27, 2023

"How poor are they that have not patience! What wound did ever heal but by degrees?" - William Shakespeare


We had much to celebrate on New Years Day 2022 as a few days later the S&P 500 index peaked at almost 4,800. However, the bear market arrived in 2022, and almost 18 months later, the stock market is still about 15% below its previous high set in December 2021. It feels like a distant possibility to reach a new peak, and you may view this downturn as lasting an unusually long time.


But it is important to remember that such market fluctuations are normal. Looking back at the last five major bear markets, historically it took varying amounts of time for the stock market to go from one peak to the next. The pandemic-driven bear market of 2020 marked the fastest round trip to a new peak since 1950, taking only 181 days. However, since 1950, the average number of days it took for the stock market to return to a peak was 1,166, or over three years.


During these extended periods of market malaise, investors can lose patience, leading to costly mistakes that compromise returns over time. Economist Richard Thaler refers to this phenomenon as "myopic loss aversion." Some investors may alter their asset allocation or make significant bets on risky stocks or asset classes in hopes of speeding up the return to previous peaks, which are almost always errors made at precisely the wrong time.


Since 1950, bear markets have lasted an average of 381 days. As of April 15, it has been 464 days since the stock market peaked on January 3, 2022. However, it is crucial to keep in mind that the market spends most of the "peak to peak" time climbing back up to historic levels. In other words, bear markets do not typically last for 1,166 days - the round trip does. Myopic loss aversion can be incredibly harmful because, as investors grow frustrated at the long time it takes the market to get back to a peak, it sometimes results in shifting strategies in the early stages of a new bull market, which is the wrong time to do so.


As William Shakespeare wrote, "How poor are they that have not patience! What wound did ever heal but by degrees?" It's important for investors to remain patient and stay the course, as history has shown that the stock market tends to recover in due time.


Please reach out to us with any questions or concerns. We are always ready to answer your call.