When people think of the stock market, they typically envision a chart that steadily climbs over time. Of course there are some jagged lines over the years, but historically the market makes money over the long-term. We think of this:
Today’s investors know all too well that those momentary blips can feel like the bottom is falling out. The 2020 sharp pullback, noted above, felt more like a heart attack than hiccup. Knowing that there is the potential for long-term gains and the reality of short-term pain, what can today’s investors expect going forward?
Stock Market History
Your timeframe has an enormous impact on the profitability and potential for investing in stocks. Short-term focused investors are more likely to experience losses.
The longer an investor looks, the attractiveness of stocks grows. As noted in the above chart, Annual losses of up to 39% revert to 6% annual gains over a 20-year period.
It is critical to consider the timeframe for one’s investment. If you truly are investing for the next month or year, then we do not advise an investment in stocks. Just like 2020 highlighted, a $1,000,000 investment in stocks can get cut to $700,000 within the matter of weeks.
For investors focused on retirement, the long-term potential of stocks remains a very attractive opportunity. As noted in the 20-year spectrum of returns, the worst 20-year annual return for US stocks has been 6%. But even in this two decade span, it’s possible that investors have an entire decade of -1% annual returns.
Investors must remain committed to a financial plan.
Recession: Just How Bad Can It Get?
It’s easy to look at a piece of paper with paper losses and think “I can do that. I’ll ride out the losses.” Reminder: the US stock market is quoted minute-by-minute, not decade-by-decade. That means we will have extended periods of mounting losses, accompanied by alarmist online headlines.
For investors aimed towards the future, just how often should we expect short-term pullbacks of 10% and 20%?
So for an investor focused on long-term growth through stocks, a 20-year forecast can include four bear markets and 20 pullbacks of 10%. Keep in mind that each of those four bear markets average a year in length.
This makes the 2020 bear market of 30% even more remarkable, as markets rebounded within months to fully recover short-term losses.
Solution: Diversify to Grow
Understanding that there can be protracted periods of minimal or negative growth in “the stock market,” long-term growth investors should consider investing in multiple baskets and types of companies.
For investors who have begun to focus on their investments over the past few years, US stocks have been the clear winner. That story is not entirely the same over longer periods where international and emerging markets have previously outperformed US stocks.
Looking back to 2000, investing in emerging markets has extended periods of out and underperformance compared to US and developed markets. Over the first decade of the 2000’s, US stocks returned an average of -1%. Over that same time, emerging markets had strong returns, outperforming US stocks by 10% in some years.
The following decade, concluding in December 2019, told nearly the exact opposite story. US stocks rebounded strongly after the Global Financial Crisis, returning 13% between 2010 and 2019. Coming off strong returns, emerging markets struggled and underperformed US stocks for most of the decade.
Investors are not forced to choose between US or emerging market stocks. Having investments in both will potentially help investors generate the returns they expect and minimize regret from having lost decades and gut wrenching losses.
Over the long-term, stocks have historically very attractive returns. One stock market crash is not the end of the story, but one dip along the way towards positive returns. We encourage investors to consider all stocks and build a long-term investment portfolio that does not lead to rash decisions and extended underperformance.
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An index is an unmanaged portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown.