Right here’s an e mail we received from a podcast listener lately:
This appears like one thing folks solely say throughout a bull market. But it surely’s additionally form of a good query in some methods.
Volatility just isn’t threat except it causes you to make an funding error. In reality, volatility is a chance in case you use it accurately.
And the U.S. inventory market has bounced again to new all-time highs from each single correction, bear market and crash in historical past so that may make it really feel like shares are risk-free in some methods.
Nonetheless, even a ten-ish plus 12 months time horizon will be painful at occasions.
You don’t must look that far again in historical past to discover a misplaced decade state of affairs:
From early-2000 by way of the tip of 2011, the S&P 500 went nowhere. And that is whole returns together with the reinvestment of dividends. That’s a misplaced 12 years the place the market did nada for you. It definitely felt dangerous to buyers on the time.
To be honest, it’s uncommon to see this sort of threat. Over the previous 100 years or so, returns have been constructive over rolling 10 12 months returns 95% of the time:
That’s an incredible win charge. The median 10 12 months return was a +175%.
However you’ll be able to see there have been three distinct durations of poor decade-long returns — the Nineteen Thirties, Seventies and 2000s.1 Ten years can really feel like an eternity with regards to watching your portfolio simply treading water.
That’s actual threat.
However threat can be within the eye of the beholder with regards to market environments like this.
For those who’re nonetheless saving and investing frequently, a extremely unstable market that goes nowhere for a decade is a godsend. For those who dutifully plowed cash into the market from 2000-2011 you set your self up for the epic bull market that adopted the misplaced decade.
Some folks don’t have the power to easily sit tight throughout markets that spin their wheels for 10 years in order that they diversify. Diversification can give you a smoother experience and offers you the power to lean into the ache by way of common rebalancing.
However all of this discuss is solely theoretical to an investor who hasn’t lived by way of a misplaced decade and felt the agony they will carry.
As Fred Schwed so eloquently wrote:
Like all of life’s wealthy emotional experiences, the total taste of shedding vital cash can’t be conveyed by literature. You can not convey to an inexperienced woman what it’s really wish to be a spouse and mom. There are specific issues that can not be adequately defined to a virgin by phrases or photos. Nor can any description that I would supply right here even approximate what it feels wish to lose an actual chunk of cash.
It’s simple to say what you’ll do in that state of affairs however you don’t know for certain till you really reside by way of it.
I don’t know when this can occur once more.
Perhaps market cycles have sped up and we get extra frequent drawdowns however they don’t final as lengthy. Or perhaps that’s wishful pondering and the following monetary disaster will result in a protracted interval of discomfort within the inventory market. In reality, the idea that we’ve one way or the other performed away with prolonged downturns in all probability makes it extra seemingly we’ll see one due to a Minsky mindset.
Both means, it’s at all times good to stress-test your portfolio to raised perceive the sorts of dangers you possibly can encounter within the markets.
I agree that extending your time horizon as an investor is at all times useful.
However threat nonetheless exists.
Michael and I talked concerning the thought of the S&P 500 being risk-free and way more on this week’s Animal Spirits video:
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Additional Studying:
Might We See One other Misplaced Decade within the U.S. Inventory Market?
Now right here’s what I’ve been studying these days:
Books:
1And the Seventies outcomes are worse than they give the impression of being as a result of inflation was so excessive.
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