This Is Normal

 

By:  Aaron Anderson, CFP®, CFA, Partner & Financial Analyst

April 7, 2022

 

In my last newsletter article, We Didn’t Start the Fire, I discussed how current events always give us something to fear, and the market is volatile because of it. The point of the article that I didn’t directly state, but will state now, is that this is normal. It doesn’t make it any easier to deal with, but it's normal.

The chart below shows the annual return of the S&P 500 index along with the maximum intra-year drawdown from 1980 through March 2022.[1]

 

 

You can easily see that there are many years where the market is down a lot during the year (red dot) but ends up being positive by year end (gray bar). The tiny print below the chart states that the average annual return during that period was 9.4%. There are many years shown on the chart that had above average returns by the end of the year despite having double digit drawdowns during the year.

The good thing about being long-term investors is that we can weather these storms. The S&P 500 is currently trading at about 4,478. Looking at the historical data, it first traded at these levels in August 2021.[2] While it’s unfortunate that the index has given up eight months of gains so far, it’s fortunate that it’s only given up eight months of gains so far.

I initially thought of looking back just one year before then to help see what this means as a long-term investor, but one could argue that was too close to Covid lows and would distort the results. So, let’s pick a starting date of January 17, 2020, the all-time high just before Covid, when the index was at 3230.[3] Despite the recent volatility, the index is still up about 38.6% from pre-Covid highs which works out to about 15.6% annually. Substantially better than the 9.4% average.

Looking back 30 years to April 7, 1992, the traditional “30 years and a gold watch” timeframe people think of as how long they work, the S&P 500 was at 398.06. The return works out to be 1,025% or about 8.4% annually. While this is slightly lower than the average of 9.4% mentioned earlier – likely due to the cherry-picked dates – it’s still better than a bank account.

Despite the arguments that appeal to the logical side that this is normal, it’s still hard for the emotional side to cope with. We tend to lock-in our gains mentally on the way up and so any decrease feels like lost money. But looking long term, your portfolio is likely doing much better than it feels right now.

I saw this Dilbert cartoon recently:[4]

 

 

It made me laugh because it does happen in this business, but it’s the opposite of us. We like questions from you all and we have many of the same investments in our personal accounts that you have in your accounts.[5] When the market as a whole, or even an individual investment, is performing poorly, it doesn’t make me feel better knowing you’re in the same boat as we are. I wish we could get the outsized returns the market provides and avoid all the volatility that goes with it. Anybody who guarantees they can is lying. But, I hope that it gives you some comfort knowing that we are in this boat with you.

[1] Source: Guide to the Markets | J.P. Morgan Asset Management (jpmorgan.com)

[2] All S&P 500 values sourced from: S&P 500 (^GSPC) Charts, Data & News - Yahoo Finance

[3] You can’t invest directly in the S&P 500 index. I am using it to represent overall market performance.

[4] Source: Managed Mutual Fund - Dilbert Comic Strip on 2022-02-24 | Dilbert by Scott Adams

[5] I say “many” and not “all” because we customize portfolios – including our own – based on differing goals, risk tolerances, and timing of transactions. So, the size of positions and account performance, both in absolute and relative terms, will be different.

 

Content in this material is for informational purposes only and not intended to provide specific advice for recommendations for any individual.  All performance referenced is historical and is no guarantee future results.  All indices are unmanaged and may not be invested into directly.

The Standard & Poor's 500 Index is a capitalization weighed index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. 

The economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.