Temperament and Discipline Needed in Strong and Weak Markets
- LVM Capital
- 3 days ago
- 2 min read
The market is always climbing a “wall of worry."
As Warren Buffett wisely puts it: “If you’ve got 160 IQ, sell 30 points to somebody else because you won’t need it in investing. What you do need is the right temperament.”
With all major US indices in the red to start the year, investors are wondering if this is as bad as it is going to get. The tariffs announced last week were much higher and more comprehensive than anyone was expecting. What isn’t known is the extent of the tariffs that will remain in place and the economic harm those tariffs present in the months ahead. We will get hints of real-time changes over the next few weeks as companies report first quarter earnings. And while market drawdowns always feel the worst when you are in the middle of one, historically, this is rather par for the course. So, while the S&P has had an average annualized return of 10.1% (nominal, since 1987), the average intra-year decline is 14.4%.
Looking back at major historical events, each one on its own could have felt like a pull-back or decline that would be hard to recover from, yet here we are.
Now, that is not to say that the drawdown couldn’t persist or “this time will be different” (often an investor's famous last words), but the market has shown incredible resiliency in the face of what were some major historical events.
Not too dissimilar from bond returns – where nearly 95% of your return will be based on the interest you receive – your asset allocation will be the primary driver of long-term returns (below):
As evidenced by the graphic above, generally, the higher your stock exposure, the higher your average annual return. This does come with a price, however, namely in the form of volatility. This is noted by the solid teal bars showing the range of hypothetical returns for a calendar year.
So, while investing to achieve the highest absolute return is “usually” the goal of most investors, if one is not able to stomach the volatility and starts trying to time the market – by getting in and out when things look good/bad – the chance of irrevocably impacting long-term returns by doing so becomes pronounced.
While major moves in the market – either to the upside or downside – present opportunities to rebalance, it is important, though not always easy, to stick to an allocation that meets your goals and objectives. The market is there to reward those who stay, not those who play in the day-to-day volatility.