Recently while visiting a popular financial markets website, I noticed a headline from an economist predicting a 10 percent market correction in the coming weeks or months. I thought to myself, “So what?” and was reminded of a chart I have consulted on many occasions during my tenure as a financial advisor, a chart I believe should be a guide for anyone investing in equities.
The picture of the annual performance of the S&P 500 Index from 1980 through 2020 is worth a thousand words—and potentially thousands of dollars to an investor—demonstrating, as it does, the general nature of the behavior, up and down, of large-cap U.S. company stocks. The dots represent the low-point in the S&P for that particular calendar year, while the year-end values are represented by the bars. The guide is broadly useful, considering that whether you are an investor in your 20s or your 80s, you likely have some exposure to large cap U.S. stocks.
The copy at the top of the chart states, “Despite average intra-year drops of -14.3%, annual returns positive for 31 of 41 years.” So it appears far less than bold to predict a 10 percent drop at some point in the future. More importantly, the chart reinforces the idea of being patient and not abandoning a disciplined investment strategy when it comes to investing in equities. Essentially, 75 percent of the time on New Year’s Eve over the last 41 years, large-cap investors were happy with the performance of their portfolios—assuming they stayed invested throughout the year.
Overall, the ride can be rocky. The chart reveals three separate intra-year drops in the S&P 500 of -34 percent, the most recent occurring in February and March 2020 as the Covid-19 pandemic began. On two of the three occasions, in 1987 and 2020, the Index finished the year in positive territory, though in 2008, down 49 percent at one point, it finished off 38 percent.
The chart also reminds me of when I started my career as a financial advisor, my first three years, 2000 to 2002, the S&P 500 suffered consecutive declines. It served to give me an appreciation for market volatility and to confirm that patience is a must when it comes to investing for the long term. And of course, the age-old disclaimer applies: “Past Performance is Not a Reliable Indicator of Current and Future Results.”
Volatility in stocks is common and should be expected to a degree every year. The keys are being diversified across multiple asset classes, knowing your risk tolerance, and knowing your time horizon. Discussing those issues with your financial advisor can increase your chances of a long-term positive investment outcome.
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