Investors almost universally believe that they’ll fall short of achieving their goals if they experience a sizable loss in their stock portfolio. “As long as we don’t seen any big declines,” the thinking goes, “we’ll be ok.” But nothing could be further from the truth.
Consider the graphic below, which illustrates the biggest annual drawdown or loss on the US stock market over the last 20 years, overlaid with the index’s annual return. What do you see? The stock market goes down a lot almost every single year, including last year. But stocks are up on a yearly basis the vast majority of the time in spite of these losses — stocks drop, sometimes a lot, and then recovery just as quickly, usually within the same calendar year.
Looking at all 20 years, the average intra-year loss is -21.6%, although it ranged from just -3% to -49%, unpredictably. And yet, over this entire period, US stocks were positive on an annual basis 75% of the time and averaged almost 8% per year. We saw the 2nd worst intra-year decline last year in two decades, and yet 2020 was the fifth best return for stocks since 2000.
As Dimensional reminds us, “volatility (and losses) are a normal part of investing. Tumbles may be scary, but they shouldn’t be surprising. A long-term focus can help you keep perspective” and achieve a better investment experience.
Past performance is not a guarantee of future results. Index and mutual fund performance includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. This content is provided for informational purposes and should not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.