The Cost of Earning the Market's Return

The “cost” of earning the market’s return over the long run is the pain we have to withstand during the inevitable downturns.

Most investment charts show the annual returns of the market. These charts and brochures often could lead investors to believe that while we may have a few down years, most of the time investors will be satisfied with their results.

What most of them don’t show is what transpired during the year, when investors had to weather some significant downside in order to benefit from the market’s return.

The chart below tells the whole story of earning these annual returns, as it shows the annual returns and the intra-year declines.

Chart 1
Source:  Dimensional Fund Advisors

As you can see, while there have only been four negative years in the last twenty years, investors had to endure a double digit decline in 13 of those 20 years. As you can see, even the years that were positive gave investors plenty of times that some Alka-Seltzer would have been handy. And when you are in the middle of one of these downturns, and nobody knows when they will end, it can be easy to react emotionally and say “Enough!”

In the past 12 months, we have experienced mostly upward volatility. But as the chart demonstrates, we all know that market declines are something that happen regularly and are expected. We know it will happen, but we don’t know when or to what magnitude. Hopefully, reviewing this chart might be helpful during those difficult periods.

How do we manage this frequent volatility for you?

First, we structure a diversified portfolio with investments in a variety of different stock markets and bonds that have historically mitigated volatility.

Secondly, implementing a rebalancing discipline can also provide opportunities to reduce risk when the market has been strong and to add to equities when their prices have declined and become more attractive.

Having a disciplined strategy versus reacting emotionally is paramount to having a successful outcome, and a successful outcome is our goal for you.

Thank you again for your trust and confidence in us. As always, please call with any thoughts or questions, or if there is anything new in your life and plans that we need to know.


Disclosure:  The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Beach Foster and not necessarily those of Raymond James.  Past performance may not be indicative of future results.  Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation.  Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Investment strategies mentioned may not be suitable for all investors.