Clients often ask about the best approach to investing, particularly during such interesting times, and Extraco encourages forming an investment philosophy and sticking to it for the long term.
One can take comfort in compelling data showing that periods of market downturn tend to be followed by periods of recovery that reward patient, long-term investors. Regardless of the crises causing a drop in markets, the numbers speak for themselves. Sticking with your investment plan helps put you in the best position to capture the recovery and beyond.
Sudden market downturns of 10% to 20% can be unsettling. However, US equity returns are historically positive following these events. A broad market index tracking US data since 1926 shows stocks have generally delivered strong returns over one-, three-, and five-year periods following steep declines. In fact, these tend to even be higher than the long-term average of 9.6%.
Stock returns are volatile, but nearly a century of bull and bear markets shows that the good times have outshined the bad times.
From 1926 through March 31, 2020, the S&P 500 Index experienced 17 bear markets, or a fall of at least 20% from a previous peak. The declines ranged from -21% to -80% across an average length of around 10 months.
On the upside, there were 17 bull markets, or gains of at least 20% from a previous trough. They averaged 56 months in length, and advances ranged from 21% to 936%.
Staying invested and focused on the long term helps to ensure you’re in a position to capture what the market offers. When the bull and bear markets are viewed together, it is clear equities have rewarded disciplined investors. Some might be tempted to “time the market” in an attempt to avoid the bad days and capture the good days. The impact of missing just a few of the market’s best days can be profound. There is no proven way to time the market by targeting the best days or moving to the sidelines to avoid the worst. History argues for staying put through good times and bad.
Since 1926, the US stock market, as measured by the S&P 500 index, has rewarded investors with an average annual return of about 10%. But it’s important to remember that returns in any given year may be sky-high, extremely poor, or somewhere in between.
In conclusion, the stock market’s ups and downs are unpredictable, but history supports an expectation of positive returns over the long term. The best investment plan is to have one and to stay the course.
Source of market data: Dimensional Fund Advisors LP
Courtesy of Extraco Banks
