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Reaching Your Destination Requires Planning for the Journey

Investment Management

About a year ago, I came across an illustration from JPMorgan’s Guide to the Markets that I found to be a very interesting way to look at the path traveled by investors.

Often, clients will look at the history of an investment and only see the final results, while overlooking the “roller coaster” ride they must sometimes endure to achieve those results.

Going back to 1980, JPMorgan details each calendar year’s result for the S&P 500 along with the largest intra-year drawdown experienced.  On average, the data shows that the S&P 500 has experienced roughly a 15% intra-year decline per year, despite generating positive calendar year returns roughly 75% of the time.

The smallest intra-year drawdown occurred in 1995, only declining 3%.  On the other extreme was the Global Financial Crisis in 2008, during which the S&P was down nearly 50% at its most extreme.

I think this is critical information for investors to think about.  In terms of setting expectations, if history provides any guide, investors need to be mentally prepared to endure at least:

  • 10% or greater declines each year
  • 10-20% declines at least once every two or three years
  • Greater than 20% declines at least once every five or six years

Now, looking at the data including 2017.  So far, we have experienced one of the lowest volatility markets in history and have experienced only positive months for the S&P 500 this year.  The biggest drawdown we have experienced has only been about 3%.



I know my gut reaction, and one I see in the headlines and hear frequently, is that we MUST now be overdue for a correction because of this, right? That reaction is natural human behavior.  Our minds want to find patterns and trends, where oftentimes there is no evidence that the trend is anything but random.  It is sort of like going to Vegas and seeing red hit on the roulette wheel 9 times in a row and just knowing that you should bet on black because it is “overdue”, even though mathematically you know the odds are still 50/50.

Going back to 1980, we only have one other point of comparison where the intra-year drawdown was only -3%, and that was back in 1995 (blue circle). Had an investor shied away from the market in 1995, because they felt that a correction was overdue and thought they should wait for it to occur before investing, they would have missed several strong years.  You can see the return for 1995 as whole, and the following 4 consecutive years all exceeded 20%.

Were there drawdowns?  Of course.  However, if the investor thought they should wait until a 10% pullback before investing, they would have waited until sometime in 1997 to get in.  Or maybe they thought about a 20% pullback as being their entry point, in which case they would have never invested until 2001, buying right into the collapse and falling further into 2002.

Will there be drawdowns going forward from here?  Of course.  That is one of the few things we can be fairly certain about.  It is exactly this volatility and risk that provide investors long-term excess returns from stocks.  However, quite simply, no one really knows when it will be, how big it will be, or how long it will last.

It is a bit of cliché, but we are firm believers that it is ultimately time in the markets, not timing the markets that leads to the attainment of investment goals.