If I only had five minutes and one sheet of paper to give someone a crash course in investing, this chart below is the one I’d probably bring with me.
The gray bars above show annual price change for the S&P 500 Index for the past 34 years (price-only, excluding dividends). It’s a nice track record — up in 26 of 34 years, down in seven of those 34 years, and flat in 2011. The S&P 500, which started 1980 at slightly more than 100, reached more than 1,800 in December 2013.
I like this graph because it captures how positive the long-term trend of this bellwether index has been. But those gray bars tell only part of the story. The orange dots represent the largest intra-year decline experienced each year. For instance, in 1997, the index was up 31 percent for the full year, but at some point, it encountered an intra-year decline of 11 percent. The following year, the market was up again, but only after surviving a 19 percent decline along the way.
The average intra-year decline over 34 years has been 14.4 percent, more than enough to make investors start to wonder and worry. Some declines have been much larger (and far scarier). Still, there have been many investors who have been able to calm their fears and keep their finger off the panic button through recessions, bubbles and fiscal cliffs.
The S&P 500 rose strongly during 2012 and 2013, and it experienced only relatively modest intra-year declines. With the recent market decline, this seems like a good time to remember that along with the positive gray bars, we must also expect and tolerate negative orange dots. The key takeaway here is that short-term declines are less important than long-term goals.
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