Investment Performance: It’s a Matter of Perspective

Have you looked at any stock market charts recently? The market has risen for four straight weeks, and things are looking up. In terms of raw numbers, the S&P is up nearly 50% from its March lows. Here’s the chart.

Given the above, the stock market is really on a tear. Right? Well… It’s depends on your perspective. Let’s step back and see how things look since the Fall of 2007.

Ouch. Even after the rally this spring/summer, the S&P 500 is still down roughly 35%. Let’s look back a bit further.

Hmmm… A rough ride, but the market is up 22% since the Fall of 2002. What happens if we look back even further?

Yikes. Another rough ride, but this time the news is considerably worse. Down 33% over the past nine years.

Okay, lets step way back to gain a bit of historical perspective…

Interestingly, if you look at that last chart, you’ll see a very steady progression until right around 1994. After that, you get two major spikes followed by painful periods of “regression to the mean.” Note that there was also a less pronounced blip in the runup to Black Monday in October 1987, which marked the largest one day percentage decline in stock market history. Even still, we’ve seen a better than 980% gain since 1970.

I haven’t actually played with the raw data, but just by eyeballing things, it looks like we’re still a bit short of where we would’ve been if that pre-1994 historical growth pattern had continued. I’m not going to make any arguments about whether or not the stock market is currently over- or under-valued, as I really don’t know, and you also can’t tell by looking at price alone.

To me, the most important lesson here is that you need to interpret investment news very, very carefully. Moreover, you need to keep your personal timeframe in mind when making investment decision. Over short time periods, things can get wild. As you ratchet back to much longer timeframes, however, things become more predictable.

Note: Yes, I picked and chose the start dates for these periods to make things look as good or bad as possible. That’s the point.

9 Responses to “Investment Performance: It’s a Matter of Perspective”

  1. Anonymous

    Nice graphs. I love how you can see the two big bubbles on the last chart.

    Well, I don’t love that the bubbles happened, but it is a really interesting and informative set of graphs.

    FYI: I accepted this article into the Carnival of Economic Fun #2. It will appear on Wednesday, September 16th. Thanks for submitting.

  2. Anonymous

    Great post, and it really serves to highlight the fact that when investing for the long term you don’t need to worry about short term (month-by-month, let alone day-by-day) fluctutations.

    PS: Google finance actually has a setting change the charts from linear to semi-log!

  3. Paul: I agree that a semi-log plot would be a great way to look at these data. Unfortunately, I didn’t have the time when writing this post, and the variability issue wasn’t actually the point. Nonetheless, I think it’s a great idea. If the engineer in you is looking to kill some time, be sure to send me a copy! 😉

  4. Anonymous

    One thing the engineer in me recommends (that I’ve never seen done) is to plot the data on a semi-log graph. That is, plot time on the linear,horizontal axis the way you did, but plot the logarithm of the Dow Jones or S&P on the vertical axis. This would give a better picture of the percentage impact of gains and drops over the years.

  5. Anonymous

    Great charts Nickel! I think the bottom line is that an 8% average return is overly optimistic. 5% is a more realistic return to calculate one’s pro-forma retirement plan. Perhaps even 4%.

    I have sold 75% of all my equities over the past 2 weeks. I would suggest taking profits. Afraid of the September double dip!

    Rgds, RB

  6. Mike: I agree that we’d see a lot more volatility if we re-scaled the data. For example, Black Monday looks like a blip when it was actually a watershed even. That being said, I think you’re right that the ups and downs of the past 10-15 years have been atypical.

  7. Anonymous

    Its a little freaky when you play with the time on your investment accounts. Just to see how things were going I requested the YTD on my 401(k) – HELL YEAH UP 22%. Then I did the 1 year return – down 30% OUCH!

  8. Anonymous

    I think this post is a very neat idea. Great job visually illustrating the importance of holding period.

    I would add one caveat: Admittedly, to my knowledge, the market has been particularly volatile over the last decade and a half. However, in the last chart, it’s visually exacerbated by the fact that the volatility in the earlier periods (though significant as a percentage) looks insignificant simply because all of the amounts are small.

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