- Savvy investors know there will be periods of volatility along the way to healthy long-term returns in equities.
- Short-term volatility—sensationalized by the financial news media—is what typically disrupts many long-term investment plans.
- $10,000 invested in the S&P 500 when I started my career 30 years ago would be worth $267,000 today….but there have been periods when many considered the wisdom of saying fully invested.
As regular readers of this blog know, investing based on the long-term is relatively easy. Just look at the chart below which represents the growth of one dollar invested in the S&P 500 Index on January 1, 1984 thru the end of 2014. I began my career in finance in June of 1984, so the chart closely relates to my experience as an investor and an advisor.
When you review the chart, it’s easy to see the significant increase in an investment in the S&P 500 over that 30 year period. The drops associated with the bursting of the Tech Bubble (2000-2003) and the Great Recession (2007-2009) are also quite apparent. I remember both of those experiences very well. They weren’t fun at the time. But looking at the chart today, they seem manageable in the context of the long-term in which the index generated a very nice compound annual return of 11.18% over that three-decade period.
But the chart is misleading in a way. This long-term chart hides the short-term volatility of the markets. That’s what investors experienced month to month. This type of short-term volatility is what disrupts most long-term investment plans. The chart below plots the same returns, but on a month to month basis.
This is the same data as the chart above but it looks a lot different when considered on a monthly basis doesn’t it? The message is simple: To earn the returns in the first chart, an investor had to endure the volatility in the second chart.
If I showed you the second chart without the long-term context of the first chart, then you might not invest in the S&P 500 because it would seem too risky. As an advisor, that would be a disservice to my clients because it would impede your ability to reach your goals.
But, this is exactly what the financial news does every day. It reports the short-term ebb and flow of the markets without the context of the long-term or your goals. Why does the financial media do this?
First, it’s what the marketplace and their audience seems to want. There are legions of investors who believe that they are getting useful information from the financial news media.
Second, sizzle sells. Advertising revenue and viewership would dry up if the financial media simply repeated the simple, but effective advice: Diversify, watch your costs, rebalance and stay disciplined.
In closing, I want to add a word of caution. This post is not a recommendation to invest only in the large cap S&P 500. Your investment portfolio should be much more broadly diversified. Short term volatility if a necessary part of the investing process if you want to earn the rate of return associated with stocks over the long-term. If there was no volatility, there would be no return.