In investing, “normal” is an elusive idea. Long-term average returns are relevant for planning, but rarely does a stock market calendar year return fall within a range of 2 percentage points around the average. If “normal” does exist in the stock and bond markets, it can be loosely defined as a predictably unpredictable sequence of short-term economic events, followed by investor over-reaction and the ensuing volatile returns in the market.
After the second worst market in history hit bottom in March of 2009, disciplined investors were rewarded…as is “normal.” The cumulative stock market loss was approximately 60%, and the subsequent rise of the S&P 500, through June of 2013, was over 160%. Small and Mid Cap stock markets rose over 200%. The S&P 500 return from the previous peak through June 30, 2013, was 16.5%, so is back at new highs.
Those who exhibited disciplined investing were rewarded with the returns above. Patience is one of the greatest virtues and determinants of investor success. Our “Reality of Red Numbers” chart for stocks and bonds can help inspire patience by helping you visualize that “normal” frequently involves many short-term negative returns on the road to positive long-term returns. The front sides show returns by month. You will notice a lot of red ink, particularly in the stock version. The back sides show returns by quarter. There is less red. Annual returns show less red still. While not shown, there are almost no periods over 10 years that are red.
If you have a long-term strategy that fits your needs, choose to make patience your “normal” response, and you will be rewarded in the long-run. There is talk of the “old normal” and the “new normal.” The most successful investors will be those that accept that there is no “normal,” and then plan and stay the course accordingly.