January 25, 2022
When it comes to matters of greater importance like finances, though, the cost of impatience can be catastrophic. It is not unusual for a discouraging slew of negative returns to cause investors to deviate from their prudent long-term plan. These changes are sometimes done with the investor being fully aware that past losses have often been recouped in a short period of time. As we will explore in this piece, investors with time on their side should endeavor to rework their mentality from impatient to patient.
During the past two years, the S&P 500 has shown periods of marked volatility. At the beginning of 2020, the market experienced a dramatic downturn, followed by a rapid recovery and record-setting growth. The pain of this recent bear market was acute but fleeting. It came and went so quickly that investors, basking now in the seemingly daily record closes on the S&P 500, may not be mentally prepared for the next market downturn when it comes - and it will come at some point. To help get you ready for that eventuality, we present below some numbers that are meant to both highlight short-term volatility but also underscore the long-term consistency of the market. You may want to bookmark this piece to provide some relief during tumultuous markets, to remind you that while one bad year may hurt a portfolio, we have not yet seen a time when the market has not recovered.
Table 1 shows how surprisingly steady returns on the S&P 500 have been since the early 1940s when the time period is long enough. The forty years ending in 1981 yielded an annual return of 11.7% and the same length of time ending in 2021 returned 12.3%, which was only up 0.6% more per year. The eighty years ending in 2021 yielded an annual return of 12.0%.
Table 2 illustrates the annual S&P 500 returns since 1942. When a significant market correction has occurred, recovery has often followed relatively quickly. It is rare indeed that the market strings together several years of negative returns in a row.It is during those rare events that investors need to remind themselves of their time horizon which is almost always longer than one year.
At the most basic level, investing is about perspective. If someone planned to retire soon and was fully invested in the S&P 500, a market correction would be devastating. At that point in time, a 20-year return would be irrelevant. The counter to that is a young professional just starting to save in a retirement plan. Counter-intuitively, such a market swoon should be welcomed as new savings Table 2Table 3purchase assets at a lower price. Outcomes vary according to each investor’s need for money. Both timing and amounts of money are important.
In summary, markets are significantly more volatile when observed in short snippets of time than when we zoom out and take a longer view. When The Great Recession of 2007 to 2009 occurred, it was undoubtedly the worst economic crisis in almost a century. In relative terms, when observed over almost 100 years, the crisis appears to be a small correction. The economic crash of 2020, fueled by the Coronavirus was a major correction. About 2 years later, the stock market reached new highs. It may be possible that when we zoom out once again, the economic crisis of 2020 may appear to be a small correction in a much longer time frame. History leaves us with two important lessons: first, investors’ perspectives should match their time horizon and goals. Second, patience is important when considering one’s investments and financial future.
Past performance is no guarantee of future results. Securities offered through M Holdings Securities, Inc., a Registered Broker/Dealer, Member FINRA/SIPC. Investment Advisory Services offered through Cornerstone Advisors Asset Management, LLC, which is independently owned and operated.This material is prepared by Cornerstone Advisors Asset Management, LLC (“Cornerstone”) and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the Q1-2022 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cornerstone to be reliable, are not necessarily all inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cornerstone, its officers, employees or agents. This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. The information is provided solely for informational purposes and therefore should not be considered an offer to buy or sell a security. Except as otherwise required by law, Cornerstone shall not be responsible for any trading decisions or damages or other losses resulting from this information, data, analyses or opinions or their use. Please read any prospectus carefully before investing.