The fact that the US Market had a return above 20% does not make 2017 an anomaly by any means. In fact, over the past 39 years, there have been 13 times, including 2017, that the Russell 3000 had a return above 20%.2 What makes 2017 a real anomaly was the lack of volatility.
I always like to reiterate to clients that life is not a spreadsheet – we do not expect the long-term average return of the market each and every year, which is just above 10%.3 In fact, we know that even in great years, we will more likely than not experience losses over the course of a week, month or sometimes even a quarter. But viewing 2017 as a standalone data point would surely not prove my point.
Looking back over the past 40 years, we can see that the average intra-year decline, from peak to trough, is about 14% each year.4 This means investors have to be able to remain invested at these times of peak emotional response in order to receive the long-term gains markets provide. However, in 2017, the largest pullback of the Russell 3000 was under 3%.5 This is what made 2017 a phenomenal year and also an anomaly.
Fast forward to February 2018, where we have seen almost a 10% pull back in the Russell 3000 within 10 market days.6 This is certainly not the volatility investors had become accustomed to in 2017 – but this is normal.
(Russell 3000 index return from 01/01/2017 to 02/08/2018)
At times like this, it is important to remember that volatility in the market is a common occurrence. Returns are a product of risk. If there were no risk in the market, then there would be little return on your investments. Having a well-thought out and disciplined investment plan you can stick with is critical to overall long-term investment success. This will prevent you from acting on emotions during market volatility and help you make sound decisions in uncertain markets.
1,2,5,6 – Russell US Indexes (https://www.ftse.com/products/indices/russell-us)
3 & 4 – Dimensional Fund Advisors (https://us.dimensional.com)