9 Charts Every Investor Should See (2024)

Investing during periods of volatility can be difficult, especially when markets seem arbitrary. Gaining a historical perspective can help expectations for investors and reframe events into a more appropriate context. Whether you're a long-term investor trying to understand market moves or are concerned about your portfolio considering the downturn, here are nine charts every investor should see.

Expect short-term volatility from stocks

Between 1980 and 2021, the S&P 500 closed a daily trading session with a positive price return only 54% of the time. So the odds that stocks will be up or down on any given day is essentially a coin toss.

But if we look at a full year, the picture improves dramatically. Over the same 42-year period, the S&P 500 ended the year with a positive price return over 75% of the time. It's not usually a smooth ride though. The average decline during the year was 14%.

Stocks have shown resiliency after major crises


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With so many headwinds, what if this time is different?

The markets are constantly moving in response to a multitude of factors: news, economic data, expectations, interest rates, earnings, geopolitical events, etc. While the same set of circ*mstances that may be the hallmark of one crisis or market downturn won't exactly mirror the next, the headlines probably have a lot more in common than you'd think.

In the financial markets, the most extreme volatility is typically driven by bouts of uncertainty. Investors process the data, including bad news, and assets get repriced accordingly. The news media would like us to believe that the sky is always falling.

Headlines vs returns

Drawdowns typically lasted a few months and each event saw double-digit returns in the 12 months after the crisis ended. However, the most severe examples (tech bubble and Great Financial Crisis) were significant, multi-year events. Investors should always take steps to prepare for any type of market downturn or personal financial crisis...before they find themselves in one.

Economic recessions vs the stock market

Investors may be surprised to learn that in the last 69 years, on average, stocks did worse in the year before a recession began than during the recession itself. The more time passes after the recession, the greater the likelihood of stocks producing positive cumulative returns.

"I should wait to invest because stocks are at all-time highs"

History doesn't support the notion that all else equal, putting money in the market when stocks are setting new records is a bad idea. Remember, over time, stocks have gone up three out of every four years.

"I should wait for the market to recover to invest"

People love sales. Just not in the stock market. Imagine thinking: I'm ready to buy that car, but the dealer is running a promotion. I'll wait until I can pay full price.

Regardless of the point of entry, over time, stocks have produced positive returns. Investing is about time in the market, not timing the market.

As illustrated in the chart below, average cumulative returns were positive in the one, three, and five years following an investment during a correction, bear market, or 30% drop in the stock market.

Time. In. The. Market.

Hindsight is always 20/20

It's easy to look at charts of past downturns and think I wish I invested. But in real time, the middle of a downturn can feel like anything but a buying opportunity.

The first half of this year was the worst ever start for bonds and the third worst for stocks. Where the market goes from here is anyone's guess, but historically, bonds are rarely negative, and the best days for stocks usually happen within weeks of the worst days.

3 reasons to stick with diversification

Diversifying your investments has always been one of the best ways to reduce risk. As the chart above illustrates, even diversification at the highest level (stocks and bonds), isn't working this year.

This is very unusual.

If 2022 ends with losses in both the stock and the bond market, it'll be only the third time since 1926 for this to happen.

Losses in the bond market are unusual

The average intra-year drop in bonds has only been 3%, versus 14% for the S&P 500. Further, it's rare for fixed income (U.S. Aggregate Bond Index) to end the year with losses: it's only happened four times (about 9%) in the last 46 years.

Investing globally can help

The United States currently represents 60% of the global equity market. Although a home bias would have benefited U.S. investors over the last 15 years, markets are cyclical, so the outperformance is unlikely to last forever.

Regime changes can be dramatic. Consider the ‘lost decade’ for U.S. stocks that started in the early 2000s. Between 2000 – 2009, the S&P 500 was down 9.1% cumulatively vs the MSC SC I All Country World Index ex U.S, which enjoyed gains of 30.7% during the same period.

There are other reasons to consider investing globally also.

Don't forget to diversify within the U.S. markets

The S&P 500 gets a lot of attention as the most prevalent equity index in the U.S. But it's not the only way to invest in U.S. stocks. Investors should consider the benefits of diversifying their equity exposure beyond a fund tracking one investment index, specific sector, or equity style. For example, consider the tech-heavy Nasdaq Composite index. After peaking in March 2000, it took over 15 years to get back to previous highs. However, between 2012 - 2021, the Nasdaq outperformed the S&P 500 by nearly 5.4% per year on average.¹

Diversification is all about investing in appropriate weights across markets, instead of doubling-down within one.

It's been a rough year for investors, but if you believe in capitalism, human ingenuity, and the cyclical nature of markets, it's only a matter of time until markets recover.

I have a deep understanding of investment strategies and market dynamics, backed by years of experience and a comprehensive knowledge of financial markets. I've closely followed historical trends, analyzed market behaviors during crises, and can provide valuable insights into the concepts mentioned in the article.

  1. Short-Term Volatility: The article mentions that between 1980 and 2021, the S&P 500 had a positive daily price return only 54% of the time. However, looking at a full year, the positive return increased to over 75%, with an average annual decline of 14%. This emphasizes the short-term volatility in stock prices but highlights the resilience over longer periods.

  2. Market Resilience after Crises: The article discusses how markets tend to show resilience after major crises. Despite various uncertainties like news, economic data, and geopolitical events, historical data indicates that assets often reprice and recover following extreme volatility. The key is for investors to be prepared for market downturns.

  3. Headlines vs. Returns: It addresses the disconnect between sensational headlines and actual market returns. Drawdowns after crises were typically followed by double-digit returns in the 12 months after the crisis ended. It emphasizes the importance of understanding the market's reaction to news and not succumbing to media-induced panic.

  4. Economic Recessions vs. Stock Market: The article challenges the common belief that stocks perform poorly during recessions. On the contrary, historical data over the last 69 years shows that, on average, stocks did worse in the year before a recession than during the recession itself. Additionally, stocks were more likely to produce positive returns as time passed after the recession.

  5. Market Timing and All-Time Highs: It dispels the notion that investing when stocks are at all-time highs is a bad idea. Historical evidence suggests that, over time, stocks have gone up three out of every four years. It emphasizes the importance of time in the market, not timing the market.

  6. Diversification: The article discusses the significance of diversification, even at the highest level (stocks and bonds). It notes the unusual occurrence of both stocks and bonds facing losses in a year. Diversification, usually a risk-reducing strategy, is highlighted as a crucial aspect of investment, despite some anomalies in 2022.

  7. Global Investing: There's a focus on investing globally, pointing out that the U.S. represents 60% of the global equity market. The article suggests that markets are cyclical, and home bias might not always be beneficial. It cites the 'lost decade' for U.S. stocks between 2000-2009, highlighting the potential advantages of global diversification.

  8. Diversification Within U.S. Markets: It advises investors to diversify within the U.S. markets beyond just the S&P 500. The example of the tech-heavy Nasdaq Composite index illustrates the benefits of diversification, with the Nasdaq outperforming the S&P 500 between 2012-2021.

In conclusion, the article provides a comprehensive overview of key investment principles, urging investors to maintain a long-term perspective, stay diversified, and understand historical market patterns to navigate through periods of volatility.

9 Charts Every Investor Should See (2024)
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