Recently, Weston Wellington from Dimensional Fund Advisors shared a presentation expressing the importance of sticking with your plan during turbulent times titled “Stay In Your Seat”. The presentation was a brilliant juxtaposition between financial market turbulence and turbulence you may experience on a cross-country flight, emphasizing the value of staying in your seat in each encounter. There is no doubt that the stock market has been turbulent this year with its share of ups and downs. However, most of the time you will likely hear much more emphasis on the market downturns (which are typically far more infrequent than market upturns) from the media reporting on them. It is important to understand that the media is incentivized to keep you watching and they know that fear causes much higher ratings for them than reporting about things that are good. This phenomenon is captured perfectly by this illustration:
There is no doubt that sudden market downturns can be unsettling. But it’s imperative to remember that historically, US stock market returns following sharp downturns have, on average, been positive:
Here are some of the important highlights to remember:
A broad market index tracking data since 1926 in the US shows that stocks have tended to deliver positive returns over one-year, three-year, and five-year periods following steep declines.
Cumulative returns show this to striking effect. Five years after market declines of 10%, 20%, and 30%, the cumulative returns all top 50%.
Viewed in annualized terms across the longest, five-year period, returns after 10%, 20%, and 30% declines have been close to the historical annualized average over the entire period of 9.8%.
Sticking to your plan helps navigate inevitable turbulence and puts you in the best position to capture the recovery.
Stay in your seat.
Disclosure:
Past performance is not a guarantee of future performance. The views expressed herein are exclusively those of Efficient Advisors, LLC (‘EA’), and are not meant as investment advice and are subject to change. All charts and graphs are presented for informational and analytical purposes only. No chart or graph is intended to be used as a guide to investing. EA portfolios may contain specific securities that have been mentioned herein. EA makes no claim as to the suitability of these securities. Past performance is not a guarantee of future performance. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.
