Stocks Move in “Bursts”
Even if you are not a finance expert, you probably know, or could make a reasonable guess of the average annual return of stocks – somewhere in the neighborhood of 10%. To be exact the S&P 500 has returned, on average, about 10.25% annualized since 1926.
Of course, 10.25% is an average rate of return and is not a steady or a consistent increase each year. In fact, since 1926, the S&P 500 has only achieved returns in the 10% to 11% range on one occasion – 2004! Stock returns are unpredictable in the short term.
Wouldn’t it be awesome if you could invest your money and earn a consistent 0.85% every month (10.25% each year)? Unfortunately, the fact of the matter is that stocks often move in abrupt bursts. These bursts of volatility can lead to high stress, doubts, or even unrealistic return expectations.
One of the most extreme examples of the market moving in bursts happened from 2008-2009 during the Great Recession, when the S&P 500 declined by a whopping 38.5% in 2008 and miraculously advanced 23.5% in 2009. That’s right, a 62% returns swing in a matter of a year!
2020: A Roller Coaster of Emotions
2020 was also a year where stocks have experienced extreme swings. Given the uncertainty surrounding the COVID-19 pandemic this year, it has been incredibly difficult to remain positive about investing in stocks – even if you are the most optimistic and long-term investor.
However, despite a global pandemic, thousands of businesses closing and amid one of the most polarizing and chaotic elections in U.S. history, the S&P 500 has increased around 12.5% year-to-date (as of Dec. 3rd ). But, it has not been a steady 12.5%. In fact, check out this progression of how the S&P 500 has moved this year.
You will note in the following graph that from Feb.19-March 23rd the S&P 500 declined by a whopping 34%!
Then, right about the time when investor sentiment was at its lowest, stocks reversed course and advanced by 31% over the next month! What a profound recovery!
Then, over the next 5 months there was a fairly consistent increase of 21.8% or so.
Then, from September 2nd to October 30th there was a “correction” of nearly 9%.
Finally, stocks resumed their advancement, from the end of October until now (December 3rd), by about 12%. What an incredible ride!
Now back to our original graph. On March 23rd, the S&P 500, the most widely followed index in the world had declined by 33%. We were all experiencing the unimaginable fear of a looming global pandemic unlike the world has seen in 100 years. Since that point, the index is up almost 65%!
Parting Thoughts:
Being a long-term investor is very challenging at times! The stock market is highly volatile and can have massive swings in a matter of weeks. We can’t expect this type of boom every time stocks decline significantly. However, it’s important to keep in mind that over time, profits drive corporate growth and corporations will find a way to keep growing and progressing even amid problems in the world.
I don’t think anyone could have known on March 23rd that stocks would advance, even as we continued to see economic uncertainty stemming from the COVID-19 pandemic. It is imperative to not succumb to fear and have a long term financial plan that will keep you grounded and focused during periods of market turmoil.