Those who chose to sit out stock-market volatility also likely missed out, according to new analysis
No one could blame investors who got spooked by the volatility in the stock markets last year, but those who decided to cash out of the stock market likely missed out as well, according to a new analysis.
In a March 2020 piece, Brompton Funds looked at trading data for the S&P 500 covering the period from 2000 until 2019, and concluded that investors would have seen their returns over this time go to 0% and turn negative just by missing the 20 best-returning days over that period.
More recently, the firm revisited the exercise to look at how investors in Canadian and U.S. equities would have been impacted if they’d chosen to save their money rather than invest it in 2020.
Referring to data from Scotiabank, it noted that U.S. savings accounts saw deposits rise by US$2 trillion since February 2020 as consumers cut back on spending and benefited from direct cash payments and other forms of stimulus and relief from the federal government. Household savings rates in the U.S. reached record levels, peaking at 33.7% of disposable income in April.
“Additionally, many investors increased their cash position as markets sold off in the first quarter and as volatility remained elevated throughout the year,” Brompton Funds said in its new analysis.
While the firm noted that sitting out the markets is understandable, investors who put cash in a savings account during the pandemic when they could have stayed invested either in whole or in part wound up making an investment mistake last year.
Based on data in the U.S. going back to December 1987, the firm said year-on-year changes in deposits tend to decrease as economies recover from recessionary periods. Surplus cash flows back into the economy through increased consumer spending, capital investment, and equity market deployment, leading to an acceleration in corporate profits.
“As capital flows back into the system, corporate profits benefit from the additional demand and economic growth moves higher,” Brompton said. “Equity markets will benefit from greater profits.”
Based on data from Refinitiv, the firm said an initial amount of $10,000 would have grown to $11,840 in 2020 if fully invested in the S&P 500, based on the S&P 500 Composite Total Return Index. The same amount fully invested in the S&P/TSX would have increased to a more modest $10,560, based on the S&P/TSX TRI.
Missing one best day for returns reduces the final S&P 500 and S&P/TSX amounts to $10,823 and $9,432, respectively. Two best days missed, and those values go down further to $9,900 and $8,956. Sitting out as the 10 best days happened would have left investors in the S&P 500 and the S&P/TSX with $6,714 and $6,508, respectively.
“We reiterate our conclusion from March 2020 that exiting the equity market and sitting on the sidelines can come with a significant cost,” Brompton said.