Should the Average American Ignore Their Brokerage Account?

With the market having its worst start to a year in decades, is it smart to just stop paying attention?

The S&P 500 declined by more than 20% in the first half of 2022, which is the worst start to a year for the benchmark index since 1970. And it can certainly seem overwhelming to watch your brokerage account lose value seemingly every day.

As a Certified Financial Planner®, the most common question I've received recently has been, "Should I just ignore my brokerage account?" And for most Americans, the short answer is probably. Here are a couple of great reasons to ignore your brokerage account while the market remains volatile, as well as a few reasons you might want to check it.

Ignoring your brokerage account can prevent rash decisions

According to Dalbar's 2022 Quantitative Analysis of Investor Behavior study, the average equity fund investor has achieved 7.13% annualized returns over the past 30 years. This might not sound too bad, except that the S&P 500 has grown at a 10.65% annualized pace over that period.

This means that the average investor would have grown a $100,000 portfolio to about $789,000 over the past 30 years. On the other hand, by simply investing in a low-cost S&P 500 index fund and forgetting about it, they would have grown it into more than $2 million.

One big reason for the average investor's underperformance is overtrading. It is common knowledge that the goal of investing is to buy low and sell high. However, our instincts tell us to do the opposite. When our investments plunge, we get the urge to sell "before things get any worse." Panic selling can be devastating to your long-term performance, and ignoring your brokerage account can be a smart way to avoid it.

Stocks are still a great place to be for long-term investors

Of course, nobody likes watching their portfolio's value go down. It can be extremely stressful to watch your nest egg decline by 20%, 30%, or more in just a few months. But it can help to put things into perspective by looking at other times this has happened.

Consider the market crash in March 2020 when the COVID-19 pandemic started. If you had invested in the S&P 500 when it had first fallen by 20%, your investment would have produced total returns of 46% in just over two years since then, and that's after the recent drop.

Let's rewind the clock a little further to the 2007–2009 financial crisis bear market. Although the market ended up falling much further, investing after the initial 20% drop (in July 2008) would have resulted in 320% total returns to date. And if we go back even further to the dot.com crash in 2000–2001, investing after the initial 20% decline would result in 386% total returns in the roughly two decades since.

The point is that while it can seem scary right now, and there's certainly a chance that stocks can fall even further, owning stocks when the market has already declined by 20% has historically been a smart move. Bear markets are scary, but they are a normal part of long-term investing.

There are some good reasons not to ignore your brokerage account

In most cases, periods of market volatility are good times to simply take a step back and let the economic turbulence play out. However, there are some good reasons why checking your brokerage account might be a good idea.

One example is if you have extra cash to invest while your favorite stocks and funds are lower. As mentioned, investing when the stock market has already declined by 20% is a great long-term decision from a historical perspective. In fact, most of the times I've logged into my brokerage account in 2022 were for the specific purpose of bargain-hunting.

It can also make sense to check your brokerage account to make sure your portfolio is properly balanced and that your short-term needs are met. You can read a guide to portfolio rebalancing if you'd like to learn more, but the general idea is that rebalancing is a smart thing to do every so often, especially after the market moves sharply in one direction or another.

The point is that like most financial decisions, there's no perfect answer for everyone. If you're a long-term investor and you don't have an immediate need to make certain portfolio moves, it can definitely make sense to ignore your brokerage account for a while. But there's also nothing wrong with hunting for bargain investments or doing necessary portfolio maintenance during this time of market downturn.