While our cave-dwelling ancestors couldn’t grok the modern world, human evolution hasn’t kept pace with the rate of technological change. Our brains remain hardwired to avoid danger, be it a saber-tooth tiger or recent declines in our portfolio.5
For most investors, the pain of investment losses stings harder and lasts longer than the joys of similar-sized gains. As a result, many of us focus more heavily on the short-term, particularly during periods of market upheaval. Unfortunately, history shows investors who overreact to market events typically end up doing worse than if they stuck to their long-term plan.
Consider the following:
- From 1919 through 2021, the U.S. stock market has never had negative returns on a rolling 20-year basis. And since 1972, the S&P 500 hasn’t had negative returns on any rolling timeframe longer than 12 years.6
- In the past 28 years, the S&P 500 had an average intra-year decline of nearly 15%. Yet the index had positive annual returns in over 70% of those years.7
- Since 1989, the S&P 500 outperformed cash 88% of the time on a rolling 10-year basis (see chart below).8
Tip: It’s critical to focus on your time in the market rather than worrying about timing the market. Building a diversified portfolio can smooth the ride, which can help you stay the course even through turbulent markets. iShares Core ETFs can make this easy by providing low-cost access to global stocks and bonds. Additionally, minimum volatility strategies such as the iShares MSCI USA Min Vol Factor ETF (USMV) can help reduce risk within the stock portion of a portfolio, which can help you stay in the market, for the long-term.
Stocks vs. Cash: Time has been on the side of equities
Source: Morningstar. Data covers period 12/31/1989 to 12/31/2021. Stock returns are represented by the S&P 500 total return index. Cash returns are represented by 3 Month US T-Bills.
Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Index performance does not represent actual Fund performance. For actual fund performance, please visit www.iShares.com or www.blackrock.com.
Chart description: Bar chart showing the percentage of rolling periods during which the S&P 500 outperformed U.S. Treasury bills; the probability of stocks outperforming cash historically increases with time.
Of course, breaking bad habits is easier said than done (and potato chips taste good!). We know there’s no magic wand to change human nature but hopefully having awareness of these common errors can help you avoid costly mistakes and potentially achieve better returns in your portfolio.
This article was originally published on iShares.com on Oct 3, 2022.
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1 Berkshire Hathaway Inc. second-quarter results, released Aug. 6, 2022.
2 Hsu, Jason C. and Myers, Brett W. and Whitby, Ryan J., Timing Poorly: A Guide to Generating Poor Returns While Investing in Successful Strategies (May 1, 2015). Journal of Portfolio Management, Vol. 42, No. 2, 2016.
3 Source: S&P Dow Jones Indices: S&P Persistence Scorecard as of June 2021. The S&P Persistence Scorecard is released twice per year and uses a survivorship bias free mutual fund database to track the consistency of top performers over yearly consecutive periods. Index funds, sector funds, and index-based dynamic (bull or bear) funds are excluded from the sample. Only the share class with the highest previous return for each fund is used. Past performance does not guarantee future results.
4 Morningstar, as of 6/30/2022. Comparison universe is ETFs and mutual funds in the Morningstar category and uses total return. IVV, IJH, and IJR 89%, 72% and 92% of their ETF and mutual fund peers over the last ten years. Performance may be different for other time periods. Past performance is no guarantee of future results.
5 Source: Evolved attitudes to risk and the demand for equity — PubMed (nih.gov).
6 Source: Bloomberg, Crestmont Research.
7 Source: BlackRock, MSCI and Morningstar. Calendar year returns for period 1994 to 2021.
8 Source: Morningstar. Data covers period 12/31/1989 to 12/31/2021.
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