The Price of Admission.
Nobel Prize-winning economist, Milton Friedman is known for saying “There is no such thing as a free lunch.” This quote is often used to illustrate the idea that getting something for nothing is impossible, and investing is certainly no exception.
The S&P 500 (index used for tracking the performance of the 500 U.S. largest companies), has provided exceptional returns, averaging 10.2% since its inception (1). $10,000 invested in the S&P 500 30 years ago would now be worth well over $100,000 today.
Long-term investors reap the rewards of patience and consistency. Allocating a portion of your portfolio to equities allows you to earn better returns than other asset classes such as bonds, cash, and real estate.
If you want equity-like returns to help boost your portfolio and achieve your long-term goals, volatility is the price of admission.
Big gains and big losses are part and parcel of stock market investing. From 1928, through 2023, the S&P 500 was up 70 out of 96 years, or 73% of the time. Even in 35 of those 70 positive years, the S&P 500 still experienced a double-digit pullback.
94% of years have had a pullback of 5% or more, and a double-digit drawdown occurs almost two-thirds of the time. Yet, despite this volatility, most years still end up positive (2).
Warren Buffet famously states “Time in the market is more important than timing the market.” Attempting to time the market typically results in significantly worse returns.
Trying to time the market by selling when it’s falling and buying back when it’s rising is often a fool’s errand. The market tends to rebound quickly, with some of the best days closely following the worst days.
Research shows us that missing only 30 of the best days in the market over the last 20 years would reduce your return by nearly 9%. Missing 60 of the best days would leave you with returns of -4%, while the S&P 500 was up nearly 10% (3).
The recent volatility is par for the course. In times like these, it’s essential to stay committed and remain consistent with your long-term investing strategy.
That said, volatility can be emotionally challenging. If you’re feeling uncertain about your investments, or want to review your portfolio strategy, please don’t hesitate to reach out.
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J.B Maverick. "What Is the Average Annual Return for the S&P 500?" Investopedia, April 24, 2015. https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp#:~:text=The%20index%20has%20returned%20a,will%20not%20enjoy
Ben Carlson. "This Is Normal." A Wealth of Common Sense, August 2024. https://awealthofcommonsense.com/2024/08/this-is-normal-2/.
Fool Wealth. "Timing the Market." Fool Wealth, n.d. https://foolwealth.com/hubfs/one-pager/timing-the-market.pdf?hsLang=en.
