Learning how to invest in the stock market can be an overwhelming process. In this short video, HTG Investment Advisors President Robin Sherwood shares her favorite slides on investing in the stock market. We often use these slides in the course of educating our clients about what they can expect as stock investors.
The slides are from J.P. Morgan Asset Management, who prepares many wonderful educational materials on investing in equities and fixed income. Many thanks to J.P. Morgan for the slides that you’re about to see.
What to Expect When Investing in the Stock Market
On this first slide, we’re showing the annual returns for the S&P 500, the 500 largest US stocks, from 1980 to 2020. Each bar represents the annual return for the index for that calendar year, each solid bar. For example, if we look at the left hand side of the page, 1980, we see that the return for that year was 26%. And if we look at the far right, we see for 2020 the return was 16%.
So what do we see right off the bat? Well, the first thing is that the positive returns far outweigh the negative returns. In fact, returns were positive in 31 out of 41 years, or 75% of the time. But what I think is most interesting on this chart is to look at the red dots that lie below the calendar year returns. Going back to the 1980, on the far left, we see that the annual return for the whole year was 26%, but we see the red dot lies below the calendar year return, showing a -17%.
What this shows is that sometime during 1980, there was a peak to trough decline in the market of 17%, but it ended the year in a positive territory of 26%. And likewise, if we go over to the far right and we look at 2020, we see the return for the year was 16%, but we experienced a 34% decline, and we all remember that pretty well, in the February/March/April timeframe. But by the end of the year, we had recovered to 16%.
Unraveling the Data
What is the key message of this set of data? Well, I think what it tells me, looking at the red dots that lie below the calendar year returns, is that as investors, we have to expect that there will be a decline in every calendar year on the order of 5 to 20%, that this is not out of the ordinary. In fact, it’s to be expected, and as investors, we shouldn’t let these short-term declines derail our long-term investment plans.
Diversification and Time Horizon
In this next slide, we’re looking at the range of stock and bond returns, compared to a 50/50 balanced portfolio; 50% stocks, 50% bonds. On the far left, we see in the green bar that the potential for loss during a one-year period in stocks could be as much as 39%.
The blended portfolio in the grey bar reduces this risk to -15%, but a greater reduction in risk is by holding stocks for more than five years, as we can see that the reduction in risk is from -39% to -3% for those investors who hold more than five years, and even greater reduction in risk for those investors holding for ten years to -1%.
The message here is that clearly for those who are willing to stay invested for longer periods of time, risk reduction is possible.
If you are looking for professional guidance in your investment decision making, please contact us and we will be happy to help.