By Rick Waechter, Founder, and Justin May, Portfolio Manager
Our friends at Dimensional Fund Advisors create a lot of interesting charts which help put investing in perspective. They can be especially useful when markets get, ahem, choppy.
One of those charts is below. For every year since 1979, it shows three data points for the Russell 3000, an index tracking the US stock market: the largest intra-year gain (represented by the light blue bar), the worst intra-year loss (the grey bar), and the year-end gain or loss (the large blue dot).
What should you notice?
- On average, the US stock market has gone up. Most of the dots are above 0%. The market declined in only eight of the 46 years.
- Volatility to the downside is normal. In about half the years, there was a decline of at least 10% from a previous high.
We’ll direct your attention to one particularly instructive year: 2020, when the COVID pandemic began. You’ll see that at one point in 2020, the market fell by almost 40%. That is the low point on the bar. Then the market rallied sharply, up about 80% from the low. That is the high point on the bar. The year ended with a positive return of just over 20%, which is the large blue dot. But an investor only achieved that 20%+ return if they didn’t sell along the way.
Please also notice the chart’s design element. While the year-end return is visible if you focus on the dots, it’s not that easy to see them given all the vertical bar charts. That difficulty illustrates the challenge of investing. It’s easy to see the ups and downs. That’s what makes news. Volatility also stimulates the sale of overpriced products which promise protection from these uncomfortable gyrations in the future, but which inevitably force you to give up the potential for long-term growth. Variable annuities are a great example.
To generate attractive returns over your lifetime, you must accept this volatility. It is the price we all pay – the short-term pain that is likely to result in long-term gain. The lesson of investing over the last century is that the sacrifice pays off. Handsomely.
