TKer: It's OK to have emotions — just don't let them near your stock portfolio

A version of this post first appeared on TKer.co

When the stock market falls more than 1% in a day or a couple percentage points over a couple of days, I always get the feeling that it’s the beginning of a much bigger sell-off.

This has been consistent in my 19 years of writing about stocks. To be fair, it’s a rational feeling to have because stock market history is riddled with big, lengthy sell-offs. And you can be sure there’ll be big sell-offs, including bear markets, in the years to come.

That said, something that has changed over the years is my growing familiarity with the data, which has made me a better investor less prone to making emotionally-driven adjustments to my portfolio.

Just last week, I learned something fascinating from a Bespoke Investment Group blog post:

Emotions and investing don’t mix. Emotional investors tend to sell when the market is going down and buy when the market is going up. They should be doing the opposite. As shown below, if you only owned the U.S. stock market on the day after up days since SPY began trading in 1993, your cumulative gain would be just 44%. If you only owned the market on the day after down days, you’d be up 851%!

Sure, buy-and-hold clearly dominates. And owning only on the days after up days still came with a positive return.

But owning only on the days after declines — which are the days many investors usually feel less bullish — have produced returns that eclipse owning only on days after up days.

We’ve already talked about how the best days in the stock market come at the worst times. Nevertheless, I was surprised to see how strong the returns were if you had only held on the day after all of the down days.

This is helpful to know, especially since the odds of a down day in the stock market are relatively high at 47%. This is is why the stock market gets so much negative daily news coverage. If we only got stock market news monthly, quarterly, or annually, the odds of seeing positive stories would be much higher.

And before you think about overhauling your investment process to only own the day after down days, keep in mind that buy-and-hold was still the winning strategy.

(By the way, this whole discussion is similar to what we know about how the stock market performs under various presidents. You might assume the stock market outperforms when a Republican sits in the Oval Office. In fact, the opposite is true: The market outperforms slightly when a Democrat is president. But again, owning stocks only when a certain party occupies the White House has been a mistake. Returns have been multitudes higher when you’ve held stocks through both Republican and Democrat presidencies.)