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:
Sudden market downturns can be unsettling. However, 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 market turbulence and puts you in the best position to capture the recovery.
Stay in your seat.
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