It Depends Upon the Definition of the Word “Year”
Has this been a good or a bad year for stocks? Well it does depend upon your definition of the word “year.”
From the beginning of this year (Year-to-date or YTD), stock market volatility has been high and stock prices are down. S&P 500 Index Funds lost 2.8% through March 23. Bonds are down too. Not a pretty picture.
That looks pretty bad. But it doesn’t actually tell us much.
- Volatility is a factor this year but not unusually high. Historically, 10% declines averaged one per year and 5% (to 9.9%) declines occurred three times per year.
- The low volatility in 2017 was unusual. There were no 5% or greater declines the entire year. That has never happened.
- A decline at the beginning of the year is no indication of what will follow. In 2016, S&P 500 Index Funds declined 10% by February 11. But they ended 2016 with a 12% gain.
- Most importantly, these declines and fluctuations look bad because of the short time period being reviewed. “Year-to-date” is less than three months and not a meaningful period for a long-term investment like stocks.
Looking at returns over the last twelve months, stocks performed well.
Longer time periods show similar results.
Historically, well diversified and managed stock portfolios were good long-term investments. Short-term fluctuations and even extended declines should be expected. What happens in the first seven weeks or seven months of a year should not matter to long-term investors.
However, stock investors should be aware that the markets are overdue for a major decline of 20% or more. That is called a bear market.
Historically, bear markets occurred an average of every 3.5 years. It has now been nine years since the last bear market, so another bear market is long overdue.
These comments are not a good indication of what will happen in the future. The market could start going up again and not stop for years. Or, the recent declines may be the beginning of the long overdue bear market. Once a bear market starts, it could last for a short time or many years. Investors need to be prepared for all these possible developments.
Notes:
This is for educational purposes only. To learn more about the topics mentioned and if they are suitable for you, consult an appropriate professional. Tax laws can change at any time.
Any information provided in this presentation has been prepared from sources believed to be reliable, but is not guaranteed and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for information purposes only and does not constitute a recommendation.
Arthur Stein and Arthur Stein Financial, LLC are not authorized to give legal or tax advice. For information on your specific situation, please consult your tax advisor regarding any tax implications and your attorney for legal implications. As required by the US Treasury Regulations, you should be aware that this presentation is not intended to be used and it cannot be used for the purposes of avoiding penalties under federal tax laws.
Keep in mind that:
- Past performance is no guarantee of future performance;
- Investments involve the risk of loss of principal and earnings;
- ETFs, mutual funds, money market funds, etc. are not guaranteed by the US Government, the FDIC, a bank or anyone else.
- “Average annual return” evens out variations in the actual year-to-year returns.
- ETFs, mutual funds and individual stocks and bonds fluctuate in value and there will always be times when they lose value.
- None of the information provided is necessarily relevant to anyone’s personal situation. Circumstances differ among individuals and they should not assume that these generalizations or information applies to them.
- Investments mentioned may not be suitable for all investors.