As investors, we are experiencing a truly painful period.  Inflation, Covid, Ukraine, interest rates and now plummeting stock markets.  Since peaking on January 3, 2022, the S&P 500 is down 23%.  Some parts of the market are down considerably more, particularly large growth stocks.  As measured by the iShares Russell 1000 Growth ETF (IWF), they are down 32% since the peak.  

And yet, if we step away from the pain for a moment, and look at some longer-term numbers, something surprising is there…

• January 1, 1926 – December 31, 2018 – S&P 500 annualized return = 9.99%[1]
• January 1, 2019 – June 16, 2022 – S&P 500 annualized return = 13.56%[2]

Yes, you are reading this correctly.  The market return over the last three and half years, including the dramatic decline since the beginning of the year and the one during the beginning of Covid in March 2020, is substantially higher, then the return over the prior ninety-three years.

Warren Buffett said, “Investing is simple, but not easy”.  I interpret this statement as suggesting that while the mechanics of investing are simple, enduring the pain of market corrections is hard.  Why is the pain from market volatility so powerful?  One explanation for why it feels so bad comes from the field of behavioral finance.   Loss Aversion[3] is the term that describes how humans feel the pain of loss more than the joy of equivalent gains. 

As investors, markets like we are experiencing now are what we signed up for.  It’s not fun or pleasurable. It is the ‘risk’ in ‘risk and return’ and staying exposed to the market (and enduring the pain) during these periods is the reason why we can expect a ‘return’ on our investments. 

[1] Source: DFA Returns Web

[2] Source: Kwanti

[3] Loss Aversion was first identified by Nobel Laureate Daniel Kahneman and Amos Tversky