Putting Volatility into Perspective: It’s better than you think

The US stock market has seen two very dramatically different years in 2008 and 2009, as 2008 was the worst second worst calendar year in 84 years and then 2009 was one of the best years.

As we base our investment decisions on academic data, principles and discipline, and not predictions of the future, the data below is very helpful to gain a long-term view of market performance and put recent market volatility in perspective.

The following is a review of the total US stock market (defined as all stocks on US stock market exchanges, but not international markets) from 1926 to 2009. The data below shows the number of years that each investment return occurred, for the overall US stock market:

Loss 50% to 40%:…….. 1
Loss 40% to 30%……… 2 (including 2008)
Loss 30% to 20%……… 3
Loss 20% to 10%……… 8
Loss 10% to 0%……….. 8

Gain 0% to 10%………. 15
Gain 10% to 20%…….. 13
Gain 20% to 30%…….. 19 (including 2009)
Gain 30% to 40%…….. 11
Gain 40% to 50%………. 3
Gain 50% to 60%………. 1 (1933, just in case you were wondering!)


Positive v. negative years: There were 62 positive years and 22 negative years. Thus, 74% of the calendar years were positive.

Not just positive, but better: Not only were there many more positive years, but the positive years were concentrated with performance in the higher ranges of returns.

Randomness: I have not presented the year by year data in this blog, but the returns have no sequential pattern. Thus, the ability to predict future performance by an investor or mutual fund manager would not be assisted by this data.

Staying the course: Over time, investors have been rewarded by remaining invested in the US stock market. They will have to endure down years or periods of years, but should be rewarded for remaining committed and disciplined through those down years.

We work with our clients to educate them, so they can remain disciplined in bad and good markets. Establishing an asset allocation of stocks that is in line with your risk tolerance will lead to the ability to stay the course, remain invested as appropriate for you and your family, and which will hopefully provide you with positive stock market returns that occur over the long term.

Note: The above information is based on US stock market performance. We generally recommend that a significant portion of our clients’ stock investments be allocated to foreign markets, which is not included in the above information. We think the conclusions as stated above would be the same, if they were to include foreign stock market data. Further, adding foreign investments generally results in improved diversification, which lessons the volatility of an overall investment portfolio, which would lead to increased returns over time.

Source: Center for Research in Security Prices (CRSP), University of Chicago

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