In the short run, stocks go up and stocks go down. In fact, they go up because they go down. Think about that for a second. What vehicle has the least risk -- money market funds, CDs, savings accounts? For that lack of risk, you get to collect 0.01% to maybe 1% on your money – not nearly enough to keep up with inflation over a year, let alone over decades. Because there is very little risk of the value of your money market account going down, there is very little opportunity for meaningful growth either. Intellectually, we all understand that stocks go down and, as investors, we expect that they occasionally will. (By the way, if you don’t expect this, we should talk.)
However, we’re also prone to recency bias whereby we give greater importance to the most recent events over historic ones. This bias – captured perfectly in the illustration by Tim Urban below - helps explain why the market downturn this year feels so unsettling
Here are the returns for the S&P 500 (with dividends) for the past 3 years:
So, recently, it may feel like the market only goes up, making the current drawdown from all-time highs of 9.07% (as I write this) feel unsettling, at best. If we look closer, though, we see on the chart below that the market hasn’t been straight up the whole time. In fact, since the top on October 9, 2007, there have been 10 peak-to-trough drops of larger magnitude than the current decline, including two recessions (resulting in 30%+ declines) and two drawdowns just shy of bear market territory (a 20% decline).
In hindsight, each of these drops – even the near bear markets and recessions – look relatively small but, if we could somehow bottle up our emotions during prior downturns and access them now, we would remember that they certainly didn’t feel small or inconsequential then.
The difficulty in being an investor is we always feel like this time is different. And the reason for the drawdown usually is different. The reasons for the December 2018 drop were different from the March 2020 decline which are different than the current downturn. So, yes, this time is different. The key, though, is to realize things will always be different but people will always be the same. Investors who controlled their emotions and remained invested started on the left-hand side of the chart and ended up on the right-hand side. A bumpy ride, indeed, but a ride well worth taking. We don’t know what the future holds but we have history on our side.
Remember, you’re not investing in the “stock market”. You’re investing in the great companies of the world who continue to produce goods and services we want and need. We just happen to invest in those companies by purchasing their stock through a market.