I’ll never forget one particular game during our soccer-loving son’s first season of club soccer when he was in the third grade. Being new to the game myself, I didn’t know the rules and I certainly wasn’t prepared for how physical the game can get, even at that young age.
After getting off to a good start, he was involved in a scary midfield collision that left him on the ground writhing in pain. I was more than alarmed; I was mad. That couldn’t possibly have been a legal move the other kid put on him.
After watching the coach check that all of his limbs were still intact and moving mostly in their proper directions, I asked the coach about the play and found out that what the other kid did was completely within the rules.
Market bumps and bruises
To the uninitiated, the stock market can sometimes feel unfair as well — and scary. As the market jolts up and down, you wonder whether the floor is going to completely give way. Aren’t there any rules that govern how rough the ride can get?
Of course, there are rules that draw the line between what’s legal and illegal. However, within the legal universe, where most investors operate, there are relatively few iron-clad rules. Instead, investors have to rely on historical patterns and operating principles. Call them simply, “How things work.” Understanding all of this can make a huge difference to your confidence as an investor, and your success.
One aspect of how things work is that the path toward the market’s year-end performance number is rarely straight or smooth.
Of destinations and journeys
Many a motivational poster has been designed around the theme that the journey matters more than the destination. Of course, they both matter, but if anyone tends to be overly focused on the destination, it’s newer investors.
They see that the market’s long-term average annual return has been around 10% and they want in. But then their investments lose money one year and they wonder what they missed in the fine print.
While the market’s long-term trajectory has, indeed, been upward, it has taken investors on some interesting detours along the way. In order to read the investing map, one of the key terms in the legend that’s important to understand is the prefix, “intra.”
Intra-day changes. At one point on March 26, 2020 (early in the COVID-19 pandemic), the S&P 500 was down by nearly -3%, only to end the day with a +5.5% gain.
Not every day is that exciting, but every day does tend to have its ups and downs. So does every year.
Intra-year declines. During one particularly scary 16-day stretch in early 2020, a year that ultimately saw a +16% gain in the S&P 500, the index fell -34% from its previous high. Again, because of the pandemic, that may seem like an unfairly dramatic example.
However, look at this graphic from JP Morgan, which shows each year’s S&P 500 performance along with its intra-year decline. Clearly, declines — sometimes significant declines — in the midst of winning years are not uncommon.
The chart shows just how much pain investors often have to endure on the way toward winning years, which should help manage expectations.
Resilience in the heat of battle
As for our soccer-playing son, he hobbled around for a few days with a sore knee after the game I mentioned earlier, all the while eager to get back on the field. When he returned, he played more confidently. He had learned an important lesson about when to be aggressive and when to back off. Understanding more about how the game is played made him more effective and added to his enjoyment. Mine, too.
Ideally, that’s how investing should work as well. The longer we travel the path of an investor, the more we understand how things work. More understanding leads to better expectations management and more resilience when things get rough.
What are some of the key lessons you’ve learned as an investor — perhaps the hard way — that have made you more successful?
