March Madness – Stock Market Edition

As we prepare for basketball’s march madness tournament, it is a good time to reflect on how maddening the stock market can be.

What causes the madness of the markets? Many things, but one of the greatest frustrations to investors is the significant fluctuations in asset prices.

These fluctuations, also known as volatility, are driven primarily by dire and urgent headlines, spurious market and economic forecasts, and our own emotions. But such volatility is normal!

History of Market Volatility

For example, since 2018, just in the last 5 years, we have experienced three bear markets. But it wasn’t all bad, as the market hit new highs on 116 of the days and produced a total return of over 90%.¹

Going back 15 years to include the Global Financial Crisis, we experienced even greater volatility.

If you had invested right before the financial crisis, your portfolio would have been cut in half and you would have experienced three additional bear markets. Yet, for investors who stayed the course, they still would have earned 345%, or 9.5% annualized returns.²

Final Thoughts

Volatility, even extreme volatility, is normal. While it can affect short-term returns, earnings have historically driven long-term returns. Patience, discipline, and taking the long view can help you weather the occasional bouts of market madness.

– Jonathan

 

1. Data for daily market highs obtained from A Wealth of Common Sense, Feb 27, 2024. Returns are of S&P 500 from 1/2018 – 12/2023 with dividends reinvested and calculated at dqydj.com. Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. All indices are unmanaged and may not be invested into directly. Graphs are for illustration purposes only.
2. Source: A Wealth of Common Sense, Feb 27, 2024