Look closely at the graph below.
The grey bars are the annual stock market returns since 1980. The red dots are the mid-year (and transitory) sell-offs.
There is a red dot associated with every single year.
Yes, even as stocks usually have full-year positive returns, there is usually an intra-year sell-off (like a summer rainstorm) – which under the right conditions can be severe. Enduring those inevitable short-term market storms is the financial market’s the price of admission.
2020 was a textbook example. Reacting to the economic shutdown related to COVID-19, stocks collapsed 34% over a period of just a few weeks. So severe was the panic, that for a time, it looked as if there might be no bottom. In fact, it wasn’t until the Fed announced that it would be dumping a heretofore unimagined amount (trillions) of newly created dollars into the economy that financial conditions stabilized, and markets recovered.
In one form or another, the financial markets are always subject to unanticipated (and in many cases, unique) risk events. That is exactly why the returns available in the financial markets are potentially so much greater than those of risk-free investments. If there were absolutely no risk in the financial markets, then investors would buy and bid up stock prices to the point where forward returns were essentially that of other risk-free investments. That being the case, it is imperative (as we have noted) that you have proper allocation, risk control and emotional (behavioral) management.
A lack of any of those elements goes a long way towards explaining this final graph;
While the principles of successful long-term investing are simple, consistent implementation is hard. Anyone who thinks otherwise is wrong.
Hope and fear are not good investment strategies. Discipline, proper allocation, and behavioral control is what it’s all about. It is what we focus on continually–every day. It is the road less traveled. It is what makes all the difference.