As we move into another year, what’s your investment focus? Given the volatility of 2023, it can take discipline to stay focused on our objectives, but here are three perspectives:
1. Worth a reminder: Annual returns are almost never “average.” While we often talk of average returns for indices like the S&P/TSX Composite, annual returns often vary from the average. The visual shows the wide dispersion of annual returns of the S&P/TSX Composite Index since 1981: 83 percent of the time, annual returns did not fall within +/-2 percentage points of the long-term average return of 6.9 percent (red line. Almost 30 percent of the time, annual returns were negative. Investors should expect a wide range of outcomes each year.
2. Investing often requires patience. Markets will experience both ups and downs, and recoveries can often take time. After the last bear market — the shortest in history at a mere 33 days during the pandemic — we may have been conditioned to believe that the markets should quickly rebound. However, a look back at S&P 500 bear markets over the past 50 years (chart) shows that it has taken an average of 30 months to recover to previous highs. Consider that a 50 percent loss requires a 100 percent gain to recover. Down-market times are a normal part of the investing process and may be opportune times to build portfolios for the future. Eventually, the pendulum swings back.
3. Navigating volatility: Extend your time horizon. The more you check your portfolio, the more volatile it will feel because of the greater likelihood of seeing negative performance. History has shown that by checking the markets daily, the chances of seeing a negative return are 46 percent. However, this reduces to 0 percent for 10-year rolling monthly returns. As the graph reminds us, taking a longer-term view smooths out the impact of shorter-term volatility. Extending an investing time horizon provides the opportunity to ride out market fluctuations and volatility and, by staying invested, investors are more likely to benefit from the market’s overall upward trajectory.