This Time Is Not Different

This Time Is Not Different

April 25, 2022

It is understandable investors may be concerned over sharp declines in the stock market, but looking at historical data we will realize that "this time is not different."

Each year, one can expect the market to experience a significant correction, which for the S&P 500 has averaged approximately 14% since 1980. History has shown that those who chose to stay the course were rewarded for their patience more often than not.

This chart shows declines are not unusual and even an expected part of investing. 

The Blue lines indicate the annual year end performance of the S&P 500 while the Orange lines indicate the intra-year decline an Investor had to endure to realize the year end return. 

For example, in 1998 an Investor needed to endure an intra-year decline of 19% in order to realize a year end return of 27%. We understand this is challenging but we believe looking at the market’s durability throughout these drawdowns helps to keep a positive outlook and focus on long-term investing goals. Making long-term decisions using short-term information has historically led to less than optimal results. 

 As the chart below indicates, It has been our experience that Investors tend to see short-term volatility as the enemy. Volatility may lead many investors to move money out of the market and “sit on the sidelines” until things “calm down.” Although this approach may appear to solve one problem, it creates several others:

  1. When do you get back in? You must make two correct decisions back-to-back; when to get out and when to get back in.
  2. By going to the sidelines you may be missing a potential rebound. This is not historically unprecedented; see chart below.
  3. By going to the sidelines you could be not only missing a potential rebound, but all the potential growth on that money going forward. We believe the wiser course of action is to review your plan with your financial professional and from there, decide if any action is indeed necessary. This placates the natural desire to “do something,” but helps keep emotions in check.