Life is not a Spreadsheet

Nick Wright | February 13, 2018

For stock investors, 2017 was a phenomenal year. Even in the midst of political distractions, tensions with North Korea, and a devastating Hurricane Harvey, the US Stock Market seemed to be consistent. The market as whole, represented by the Russell 3000, (which tracks the 3000 largest companies within the United States and represents more than 98% of the US Market Cap) gained 21.13% over the course of 2017.1

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.

Sources:

1,2,5,6 – Russell US Indexes (http://www.ftse.com/products/indices/russell-us)

3 & 4 – Dimensional Fund Advisors (http://us.dimensional.com)