The U.S. stock market has taken investors on a bumpy ride in recent years. The pain of 2008 was followed by a strong rebound in 2009. While you have all heard us say numerous times that volatility is an inevitable part of equity investing, a new way of looking at the data may help you gain a better view of long-term market performance and put the market volatility of the past few years into perspective.
The chart listed (Click Here for Chart) shows the historical distribution of U.S. stock market returns since 1926. The calendar years are stacked in ascending order according to their returns. Positive years are in blue, negative years are in red. This chart illustrates that:
· Market performance over the past two years has been extreme by historical standards. In 2008, U.S. stocks experienced their second-worst calendar return in eighty-four years. Then, in 2009, stocks rebounded strongly to deliver a return in the top quartile of the historical distribution.
· Over the long term, the market’s positive return years have outnumbered the negative return years. Since 1926, the market has experienced a positive return in almost three-quarters of the calendar years.
· Not only are the positive years more numerous, the chart shows a larger concentration of performance in the higher ranges of returns.
· The sequence of calendar returns appears random, suggesting that accurately predicting future performance is a difficult task for any investor or professional manager.
Over time, the market has rewarded investors who can bear the risk of stocks and stay committed through various periods of good and bad performance. Recent years are no exception.
As always, we welcome your questions, comments and suggestions for future topics.
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