Feast or Famine: Markets are Unpredictable
Over the years we have referred to various sources to demonstrate data points on the financial markets in past articles that strive to provide a better understanding of how markets have historically performed, and what type of volatility has accompanied this performance. In the illustration above, courtesy of AMG, we can see some interesting information about how market returns occur.
The first thing to clarify is that these numbers are the totals for each calendar year. The reason this is an important distinction is that at any given point, markets can have a higher peak or trough that differs from where the market finished the calendar year. As a result, this data is less relevant to market volatility, and more relevant to the importance of staying invested in order to weather historical volatility.
When looking at volatility, one can see that the intra-year volatility can be much steeper. As the below illustration courtesy of JP Morgan demonstrates, while markets are positive roughly 3 out of 4 years, the average intra-year decline is about -14% from the peak in the market.
What we can see is that 38 times since 1926 the S&P 500 has posted returns in excess of 20% for the calendar year. Yet only 6 times has the S&P 500 posted a negative return of -20% or more during that same duration of time. What you see is a similar result with each range, with the exception of the 8%-12% range of results. This tells us that while volatility is the norm, if we stick to our investments over time, the net result is a positive return in roughly 3 out of 4 years. Yet, there are years such as 2009 in which the S&P 500 posted a 23% return (26% with the dividend yield), but at one point was actually negative -28% for the year. What we can also see is that the most disproportionate results are in the positive/negative 20% or more range. This means that market results can often be “lumpy”. This is to say that market returns are not linear. As an example, in a theoretical year in which the S&P 500 has a price return of 12%, almost certainly the return would not be exactly 1% per month. In fact, it’s more likely to be 10% in one month, with the other 2% dispersed over the course of the year.
Investors can at times get discouraged when they don’t see immediate results or frightened during downturns. This is normal, as investing is often very emotional to the average investor. However, emotions are the enemy of investing, and a good investor is one that can think analytically or hire someone to do that for them.
Missing out on these “lumpy” periods of positive results can greatly skew the long-term results. This means successful investing comes with great discipline to see the longer-term likely outcome.
