March Madness and Market Mayhem
There are 63 games in the NCAA men’s basketball tournament. No one has ever picked all 63 correctly. Not once. Yet, every year millions of fans and casual observers fill out brackets in the hopes of becoming the first.
This year, ESPN collected 17.3 million online brackets for its Tourney Challenge. It did not take long for those brackets to bust. After the first round of play, none of the 17.3 million brackets were perfect.
Why? One word: unpredictability.
It’s the same reason the stock market can be maddening at times. Just like in ESPN’s Tourney Challenge, stock market investors are picking winners and losers. The differences are they are picking companies, not teams, and it happens every day, not just in March.
One thing is clear. Over short time spans, the stock market can be as unexpected as the NCAA tournament. It’s nearly impossible to know what will happen from one day to the next, let alone one year to the next.
The chart above displays U.S. stock market returns over various rolling time frames from 1930 through 2017. As you can see, the best one-year return ever recorded was 52.6% (in 1954) and the worst one-year return ever recorded was -43.8% (in 1931). That’s a difference of more than 96 points! A lot can happen in one year.
As the lens widens, though, the data tell a very different story about the stock market. Over time, the highs and lows become less punctuated and gradually the compound annual returns become more consistent.
Since 1930, there has not been a single rolling 15-year period in which an investor would have lost money by investing in the U.S. stock market. Even the worst 15-year period generated a return of 1.6% per year.
Look at the far right of the chart. Over rolling 30-year time frames, annual returns have hovered between 8.7% and 13.6%. It pays to take a long-term perspective on stock investments.
But, you may ask, “Who has 30 years to invest?” Actually, most people do.
For starters, those fresh out of college likely have 40-45 years before retirement. They are good candidates for stock investments. Likewise, most middle-aged workers have 15-20 years before they retire, and they won’t need all of their savings on day one of retirement. In fact, even individuals on the verge of retirement are likely to live another 20-30 years, if not longer, meaning some portion of their money may not be needed for several decades.
Most investors, in other words, have time on their side – for at least a portion of their portfolio. And as the chart illustrates, stocks are a reliable investment over long periods of time.
Investing in the stock market can be maddening – and not just in the month of March. With time, however, history reveals that stock investors are appropriately rewarded.
Although your bracket may be busted at this point, your retirement account doesn’t have to be. Harness the power of the stock market for the long term. Just be ready for short-term swings as wild as this year’s tournament.