Why Think Long-Term? The Answer in 2 Charts
It's easy to think long-term during rising markets. During difficult markets, investors often question whether to maintain discipline. Here's why they should continue to do so, in 2 charts.
We can see from Chart 1 below that good times for the market have been disproportionately longer than the bad times. While there is no consistent way to predict when realized performance will be positive or negative, investors staying the course have been rewarded over the long term.
The chart illustrates the historical performance of the S&P 500 Index, highlighting periods when the market was rising and falling. Bear markets are defined as peak-to-trough downturns of 20% or greater from new index highs, while bull markets are rises from the trough through the next new index high.
S&P 500 Index total returns, Jan 1926 - Dec 2019
Using a 20% threshold for downturns
Return in USD. Chart end date is 12/31/2019, the last trough to peak return of 451% represents the return through December 2019. Bear markets are defined as downturns of 20% of greater from new index highs. Bull markets are subsequent rises following the bear market trough through the next new market high. The chart shows bear markets and bull markets, the number of months they lasted and the associated cumulative performance for each market period. Results for different time periods could differ from the results shown. Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
As shown in Chart 2 below, a broad market index tracking data since 1926 in the US shows that stocks have tended to deliver positive returns over one-year, three-year, and five-year periods following steep declines. Cumulative returns show this to striking effect. Five years after market declines of 10%, 20%, and 30%, the compounded returns all top 50%. Sticking with your plan helps put you in the best position to capture the recovery.
Fama/French Total US Market Research Index Returns
July 1, 1926 - December 31, 2019
Past performance is no guarantee of future results. Short-term performance results should be considered in connection with longer-term performance results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
Market declines or downturns are defined as periods in which the cumulative return from a peak is –10%, –20%, or –30% or lower. Returns are calculated for the 1-, 3-, and 5-year look-ahead periods beginning the day after the respective downturn thresholds of –10%, –20%, or –30% are exceeded. The bar chart shows the average returns for the 1-, 3-, and 5-year periods following the 10%, 20%, and 30% thresholds. For the 10% threshold, there are 28 observations for 1-year look-ahead, 27 observations for 3-year look-ahead, and 26 observations for 5-year look-ahead. For the 20% threshold, there are 14 observations for 1-year look-ahead, 13 observations for 3-year look-ahead, and 13 observations for 5-year look-ahead. For the 30% threshold, there are 6 observations for 1-year look-ahead, 3-year look-ahead, and 5-year look-ahead. Peak is a new all-time high prior to a downturn.
Data provided by Fama/French and available at mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html. Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund Advisors LP. Investing risks include loss of principal and fluctuating value. There is no guarantee an investment strategy will be successful. Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
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The author does not intend to provide investment, legal or tax advice as these materials are for general educational purposes only. Please consult your legal, tax or investment professional for advice on your particular situation. This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. It is not intended to be a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. Investing involves risk including the possible loss of principal. Past performance does not guarantee future results. Please refer to RRCM’s Form ADV Part 2 for additional disclosures regarding RRCM and its practices.