Is It Different This Time?

One of the hardest parts about staying invested when markets go down is the feeling that “this time it’s different.”  Even if you’ve looked at the long-term history of investing, seen the downturns and eventual recoveries, you notice that the experiences that drove those declines were different than what we’re living through today.

Feeling like it’s different this time causes you to question the wisdom of staying the course; maybe stocks won’t behave as they have in the past?  Maybe this time it’s better to get out, sit on the sidelines for a while, and wait until things improve?

The thing to realize when you start feeling this way is simply, yes, it is different this time.  Which is just like every prior period of uncertainty.  Current events are always different at the time, until they become history, and they’re no longer different—just part of the historical record.  Only when we look back do we view crises with a sense of familiarity, because we know how the story ends.  As the saying goes, there are no facts about the future.

All historical crises were unique at the time, just as the one we’re living through today or will be experiencing a year or two from now will also feel different.  What isn’t different, what doesn’t change, is the market’s response to a crisis.  Stocks tend to decline by some amount—5%, 10%, 20%, whatever, and then recover quicker than anyone expects.  And importantly, the magnitude of the bounce back is usually proportional to the decline.

Let’s take a look at one of my favorite charts from Dimensional Fund Advisors.  It looks at seven of the worst and most unique crises  we’ve endured in the last 40 years.  Take a close look at each episode and you’ll appreciate how varied these experiences were, whether you lived through them or are hearing about them for the first time.

The chart above measures the returns for Dimensional’s 60% stock, 40% bond “Core Wealth Index” in the 12 months, three years, and five years after the onset of each one of these unique-at-the-time crises.  Over one-year periods, the 60/40 portfolio is positive the majority of the time, is only negative once over a three-year period, and was never negative after five years.  This should be reassuring to you as a long-term investor.  Despite the fact that we’re frequently confronted with challenging times and never-seen-before obstacles, markets reward the disciplined investor with the expectation of higher returns and wealth if they just stay in their seat and don’t panic.

What really strikes me about the chart above, and the results that it reveals, is how unbelievably normal future portfolio performance is despite the extraordinary beginnings for each period.  Let’s focus on one-year periods, which allows us to pull in an eighth crisis that we all remember—the Covid-19 Bear Market in 2020, when the S&P 500 fell an astounding -34% in just 33 days.  

If I add up all of the one-year returns to the Core 60/40 Wealth Index after all eight of these unique crises (including the losses), I get an average gain of +10.0%.  Guess what the annualized return on the Core 60/40 Wealth Index is over the entire period of data available—1985 through 2021?  That’s right…+10.0%.  Despite the extraordinary nature of all eight of these crises, a diversified portfolio responded completely ordinary!

As long-term investors holding well-diversified portfolios, a crisis is not something we need to panic over.  Markets have proven themselves to be incredibly resilient in the face of uncertainty, and diversified portfolios do the best job of capturing the returns than markets have to offer.

There’s no need to make investment changes, unless your goals have changed.  We never know how or exactly when the crisis will abate, but we can have confidence that our investment portfolio will reward us in the coming months and years just as we normally expect it to.  There is no need to reposition yourself to avoid the potential for more near-term losses, more often than not you’ll miss out on surprise but inevitable gains.  This is why we say “this time is different” are the four most expensive words in the investment language!

One caveat for investors who have been putting off establishing a plan and a sensible portfolio that makes sense for the plan—if you’re sitting on a bunch of stocks, mutual funds, and ETFs you’ve accumulated over the years and have been reluctant to sell for tax reasons, the temporary decline in stock prices might make the tax hit more manageble.  If you’re unsure about where to start establishing or updating your plan and investment portfolio and want a 2nd opinion, schedule a 30-minute slot with me and we can discuss your specific situation.

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.