"When Will the Market Return to Normal Again?"
A popular question these days seems to be, "When will the market return to normal again?" Perhaps you've been wondering the same thing.
I get it. Given the volatility that has defined the 2020s so far, it's a reasonable question to ask.
But before attempting to answer this question, we must first define what a "normal market" is, or at least, what people are implying when they ask the question.
Since the market has returned an average of about 10% per year [1] for the last century, it's probably fair to assume that many people would define a "normal market" as an annual return close to that long-term average. So, for this exercise, let's define "normal" as an annual return of between 8%-12% in a given year.
Given the long-term average, it's reasonable to think that an annual return in this range would be a common occurrence, but this has not been the case.
Here's the data: Over the last 96 years (since 1928), the market has returned between 8%-12% just four times![2]
Even if we expand our definition of "normal" to a return of between 5% and 15%, that has occurred in just 17 out of 96 years.[2]
Pretty interesting, don't you think?
Minimal volatility is also rare with the average intra-year decline over that same time frame being about 16% each year.[3]This means that you can expect the market to fall by a considerable amount in any given year, and this has been true even in years that have ultimately offered high returns!
In looking at the data, it's pretty clear that "normal" is exactly what we've been experiencing over the last few years. The catalysts may be unique, but booms, busts, volatility, and everything in between are what's actually "normal" when it comes to the markets.
And if this is, in fact, normal, then we should probably expect more of the same in the decades to come.
Of course, based on the long-term historical return of the market, enduring all that craziness has been well worth it. And while that historical return tells us little about what the future return will be, we can be confident that the strategy required to obtain it[4]—whatever it is—will be the same. That is, staying the course.
Despite the historical success of this strategy, many investors will grow impatient or frustrated when the markets get bumpy, leading them to make poor decisions. This is why so many investors fail. It’s our ability to make rational decisions when the rest of the world is losing their minds that will likely determine our fate.
This is just as true for the world’s greatest investors as it is for you and me.
While almost every book written about Warren Buffett focuses on his investing process, in the book Buffett: The Making of an American Capitalist, Roger Lowenstein points to his character and behavior first when he said,
"Buffett's genius was largely a genius of character—of patience, discipline, and rationality."
It’s funny to think about it this way, but if Buffett was an emotional wreck during every period of intense market volatility, nobody would’ve ever heard of him. Instead, Buffett's success is built on the same foundation I advocate for so often in these notes and our conversations—patience, discipline, and rationality.
My point here today is that investors who are waiting or hoping for average returns with minimal volatility are likely to be disappointed since that doesn't align with the experience of history. Long-term investors like us know that it's far better and healthier to focus exclusively on the things we can control so that we can better endure those we can’t.
You can rest assured that regardless of what the future holds, I'll be here with you through it all, encouraging you along the way.
As always, stay the course.
Matt Holbrook, CFP®
[2] Total return (including dividends). Data from NYU Stern School of Business
[3] Charlie Bilello
[4] Of course, less any applicable fees.