This Time is Always Different
Capital Market investing isn't always easy, isn't always comfortable. Periodically we must remind ourselves why we decided to invest and why we chose the capital markets as the vehicle. Investing to make money is not a good enough reason. What if you invest and don't make money? Then you've failed. While it's true a broad U.S. stock market index1 has produced positive results over the past 5, 10, 15, 20, 25, 30, 35, 40+ year time frames2, not all investors made money over those same periods. There are several reasons for ending up with a loss over periods where the market returns were positive, some of the most common are: 1) Selling prematurely due to fear or emotions, 2) Lack of diversification, and 3) Attempts to market time. Avoiding these three mistakes can increase the likelihood of a successful outcome.
Investing as part of a financial plan is the way to go. You may build a plan for retirement with a targeted age and asset goal. You might be retired and your plan involves a lifetime of monthly distributions. You may have assets you never anticipate spending and plan to leave these to heirs. Integrating these goals with an appropriate allocation of capital market investments could validate the reason to invest and the reason capital market investments were chosen. Validation can be beneficial during trying times, like market declines.
Long-term, successful investors have several characteristics in common but the most prevalent may be the ability to normalize declines. The chart above3 illustrates broad U.S. stock market index intra-year declines since 1980. Over this 42 year period, we notice the average annual decline was 14%. Despite a double digit average decline, the index ended with a positive return 32 of 42 years, or 76% of the time. In addition, from January 1, 1980 through April 30, 2022 the broad U.S. stock market index4 delivered an annualized return of 11.87%, which included all of the declines shown in the chart above. We can conclude from this chart, as well as from personal experience, that stock market declines are normal and part of the expectation. Some are small and insignificant and others sharp and unsettling. How many broad U.S. stock market declines throughout history have failed to recover? Zero.
Each and every past decline has been temporary. Before you can say it, let me be the first&ehllip; I understand all of that but this time is different! This year marks 31 years I've worked as an investment and planning professional. I've lost count of how many times over the years I have heard that phrase. Yes, this time is different. The circumstances surrounding a market price decline are always different, however, capital markets have demonstrated resiliency and the ability to recover and deliver positive results over time has been consistent. The next time you find yourself second guessing your decision to invest and contemplating a major change to your current strategy just remember, this time is always different.
Our Capital Markets University library is available on our website at ownyourtime.com. The articles below can be found under the Capital Markets University tab.
Many other topics are available as well.
What is Inflation 06/07/2021 Stick With Your Plan 10/18/2018
Living Through a Market Decline 03/08/2016
Monetary Policy and Stock Market Returns 12/23/2015
Is the U.S. Economy Headed for a Recession 08/19/2019
1S&P 500 Index
2Dimensional Matrix Book 2021 p. 13
3JP Morgan Guide to the Markets 2022 p. 16
4S&P 500 Index
