In Volatile Markets, Stay the Course:

Market volatility comes and goes and it’s natural to wonder when it increases if this is the beginning of a correction or bear market. If it is, some wonder, should holdings be pared back or should we wait for better prices to buy more? The question really being asked is: how can we time or predict the market? The short answer is no one can and if you try or listen to those that try, you will loose.

Warren Buffett expressed it this way in the 1991 Berkshire Hathaway Letter to Shareholders; “Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.” [Source]

Recent empirical evidence is offered in an interesting article from Richard Bernstein Advisors entitled, “No One Ever Grew Wealth Being Scared.” [Source] The chart below from the report demonstrates the key point; although most asset classes returned above 8% over the past 20 years the average investor’s return was between 2-4% for the same period.

Asset vs Investor Returns[Source] Richard Bernstein Advisors LLC (RBA) “No One Ever Grew Wealth Being Scared”

Richard Bernstein is making an important and timely point that echoes Peter Lynch’s experience with the very successful Fidelity Investment Magellan Fund that he managed. The fund earned a 29.2% average annual return from 1977 until his retirement in 1990, about twice the S&P 500’s 15.8% annual return. When the fund was open to the public, it earned 21.8% annually vs. the S&P 500’s 16.2% for the 1981 to 1990 period. However, the typical Magellan Fund investor under Lynch earned an average return of 13.4% trailing both the fund’s 21.8% return, and the S&P 500’s 16.2% return.

How did the typical investor in the fund, under one of the most successful fund managers of all time, trail the fund and the overall market? Poor timing while entering and leaving the market; buying high and selling low. Individuals investors left the fund when the markets declined and asset prices were depressed and returned when markets recovered with a cheery consensus and asset prices rose to higher levels.

Peter Lynch was interviewed by PBS Frontline in the mid 1990s [Source] and made the following points:

  • “People spend all this time trying to figure out, What time of the year should I make an investment? When should I invest? And it’s such a waste of time. It’s so futile.
  • “I did a great study, it’s an amazing exercise. In the 30 years, 1965 to 1995, if you had invested a thousand dollars, you had incredible good luck, you invested a the low of the year, you picked the low day of the year, you put your thousand dollars in, your return would have been 11.7 compounded. Now some poor unlucky soul, the Jackie Gleason of the world, put in the high of the year. He or she picked the high of the year, put their thousand dollars in at the peak every single time, miserable record, 30 years in a row, picked the high of the year. Their return was 10.6 That’s the only difference between the high of the year and the low of the year. Some other person put in the first day of the year, their return was 11.0. I mean the odds of that are very little, but people spend an unbelievable amount of mental energy trying to pick what the market’s going to do, what time of the year to buy it. It’s just not worth it.”
  • “The market itself is very volatile. We’ve had 95 years completed this century. We’re in the middle of 1996 and we’re close to a 10 percent decline. In the 95 years so far, we’ve had 53 declines in the market of 10 percent or more. Not 53 down years. The market might have been up 26 finished the year up four, and had a 10 percent correction. So we’ve had 53 declines in 95 years. That’s once every two years. Of the 53, 15 of the 53 have been 25 percent or more. That’s a bear market. So 15 in 95 years, about once every six years you’re going to have a big decline.
  • Now no one seems to know when there are gonna happen. At least if they know about ’em, they’re not telling anybody about ’em. I don’t remember anybody predicting the market right more than once, and they predict a lot. So they’re gonna happen. If you’re in the market, you have to know there’s going to be declines. And they’re going to cap and every couple of years you’re going to get a 10 percent correction. That’s a euphemism for losing a lot of money rapidly. That’s what a “correction” is called.”
  • And a bear market is 20-25-30 percent decline. They’re gonna happen. When they’re gonna start, no one knows. If you’re not ready for that, you shouldn’t be in the stock market. I mean stomach is the key organ here. It’s not the brain. Do you have the stomach for these kind of declines?
  • And what’s your timing like? Is your horizon one year? Is your horizon ten years or 20 years? If you’ve been lucky enough to save up lots of money and you’re about to send one kid to college and your child’s starting a year from now, you decide to invest in stocks directly or with a mutual fund with a one-year horizon or a two-year horizon, that’s silly. That’s just like betting on red or black at the casino. What the market’s going to do in one or two years, you don’t know.
  • Time is on your side in the stock market. It’s on your side. And when stocks go down, if you’ve got the money, you don’t worry about it and you’re putting more in, you shouldn’t worry about it. You should worry what are stocks going to be 10 years from now, 20 years from now, 30 years from now. I’m very confident.

The chart below shows the annual returns of the S&P 500 for the years 1928-2015 with an average positive 11.4% return. Do you see the trend we can use to forecast upcoming changes and direction? I don’t either. The one trend we can see is the market has more positive return years than negative return years. So the longer were in the more we benefit. If we leave our money in the market it eliminates two very difficult questions; when to get in and when to get out. Time is on the side of the “patient” investor.

S&P 500 Annual Return

Let’s take advice from the best; if they can’t time the market why should we try? Stay the course, prepare for the inevitable ups and downs, and be patient. Let the market work for us and reallocate money to the patient investor from the active investor.

You are encouraged to do your own independent research (due diligence) on any idea discussed here because it could be wrong. This is not an invitation to buy or sell any particular security and at best it is an educated guess as to what a security or the markets may do. This is not intended as investment advice, it is just an opinion. Consult a reputable professional to get personal advice that meets your specialized needs of which the author has no knowledge. This communication does not provide complete information regarding its subject matter, and no investor should take any investment action based on this information. 


  1. John Smith says:

    Very interesting text. However, I am always skeptical about 20th century market analysis. With cheap oil and everything connected, of course the market was always going up. I wonder if the next century won’t bring something closer to a zero-sum game. Of course the Index would still raise, but maybe only because underperforming business would be kicked out of it…

    • Thank you for commenting, John. Your point is well taken. Maybe asking it differently; will reversion to the mean in the markets span centuries?

      Warren Buffett seems to believe “on average” businesses will grow with economic activity, more specifically with GDP growth. It seems the U.S., for one as the largest economy in the world or the emerging markets will grow at better than 0% as the middle class in emerging markets grows. So, I’m optimistic, because world growth should translate to business growth and then positive returns.

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