A video review of 30 years of market performance
It’s a video blog! The 1-minute video presents an intriguing view of the value of $10,000 invested in the stock market starting in 1992. The video starts ten years in, once the investment had grown to $26,461. After you hit the play button, you will get a groovy soundtrack and a moving line showing how the broad US stock market behaved over the 20 years from 2002-2022.
The first time you watch it, just absorb what it shows you. Notice how much less the investor would have had if they were unable to stomach the variability.
The second time you watch, make one of three audible sounds as you watch the line:
- “Ouch” when the market drops
- “Meh” when the market stays flat
- “Wow” when the market goes up
Notice how often you said each word. Notice what sort of reaction comes up for you as you watch. For many people, the “ouches” may seem more impactful than the “wows.” Such a reaction is normal, and points to a well-documented psychological phenomenon called “Loss Aversion.” We are more attuned and sensitive to losses than to gains. It has been suggested that this is related to a survival mechanism. Imagine a forager climbing trees to gather eggs in bird nests. Every tree has nests with five eggs/nest. Each nest is spaced every ten feet up the tree. Climbing to the first nest is certainly rewarding – the forager gets five eggs. However, climbing the next ten feet in order to double the egg return has a much higher risk profile – a 20′ fall would have a much higher damage potential than a 10′ fall. A smarter risk-based growth strategy would be to just climb down, and find the next tree with eggs.
It is unlikely that we can change our emotional reaction to losses and gains – those are likely baked into our psyches. There is no rightness or wrongness to loss aversion. The challenge is to check whether your loss aversion is impacting your investing behavior. Your investment plan should match you and your goals. In general, if you need money within the next 5 years, we do not suggest investing that money. However, if you have money that is not needed for the next five years, it is quite likely to lose purchasing power due to inflation. Investing long-term money to preserve your purchasing power is one of the primary reasons to invest.
Of course, the disclaimer of “past performance is no guarantee of future returns” is true. The past performance shown in this graph does not imply that the future will do the same, or even act similarly. However, as Mark Twain is purported to have said, “the past does not repeat itself, but it often rhymes.” The past long-term growth of the US stock market was largely because the market is actually a collection of businesses (or more exactly, ownership shares in those businesses). Those businesses are lead and operated by people in a capitalistic system that allows for those people and companies to flourish. And flourish they did over the 30 years shows. Will they continue to flourish? Will new companies emerge? Making an investment into the market is literally buying a bit of ownership in those businesses, and making a wager on capitalism.
I watched the video a few times, and did a little data collection (in yearly increments): 9 ouches, 2 mehs, 19 wows. Roughly one-third of the years were ouch years, but two-thirds were wow. In this video you don’t have to guess what the cost of selling at inopportune times would have been. The yellow lines tell the tale.
I wish I could tell you if the next year will be an ouch, meh or wow market. However, if I could do so, then so could lots of other people. And those people would have already placed their bets. Therein lies the dynamic of the market. We suggest making a good plan, starting with figuring out what money you need in the short-, intermediate- and long-term. Then create a strategy for those funds. A strategy you can live with whether in ouch, meh or wow times.
