Jan 15

Investing and Action Movies

by Craig Buckhout

When we go to a good action flick, we enjoy the suspense and surprises, but no one wants that experience when investing.  James Bond and Mission Impossible would not be box office hits without some interesting plot twists, and an occasional victory by the villain, and yet the end result is usually something we expect – the good guy wins.

Unfortunately, investing can be a lot like a good action movie, and it is important to remember that 2015 was just one scene, where the villains had some success, but it is not the whole story.  While we have experienced 9%-10% returns from the stock market over time, we usually get something different.  Those expected returns only emerge over long periods of time.  Like the plot of an action movie unfolding, it requires some patience, and tolerating our hero experiencing some setbacks.

The S&P 500 has produced an annualized return of 9.7% over the past 50 years, but looking at those 50 separate one-year periods, we see something very different.  In 11 of those years the return was negative; 2015 is not one of those years as total returns with dividends were 1.4%.  Still, with a long-term return of 9.7% we might expect most years to have returns close to that, say a range of 5%-15%.  Surprisingly, 40 of the 50 one-year returns were outside that range, either less than 5% or greater than 15%.  So what we expect for the average is quite different than what we experience year to year.

One of the problems we have as investors is our tendency to overemphasize near-term performance.  Behavioral economists have labeled this the recency effect.  It explains why people want to buy what just went up, and sell what just went down (usually a bad strategy), and it can also explain why it is so hard for investors to maintain a long-term perspective.  This is one reason we recommend investing based on decades of performance data, not months or even years.

The markets are starting the new year with plenty of volatility and negativity.  Perhaps if we think of it as the unfolding plot of a good action movie, we will be more comfortable enduring the inevitable ups and downs, which must be endured to achieve our long-term expectations.

About the Author

Craig Buckhout is a Chartered Financial Analyst, and Principal at Rockbridge Investment Management.  “In the early 1990s it became clear to us that ordinary people were going to need help managing their substantial savings, as 401(k) plan assets began to replace pensions as a source of retirement income. After spending the first decade of my career in the world of corporate finance, I was excited to work with clients and apply institutional investment principles to help them achieve their goals.”  Craig holds his BS & MBA from Cornell University, and is a member of the SUNY ESF (College of Environmental Science and Forestry) Foundation Board – Treasurer, CNY Community Foundation – Board Member.
Learn more and/or Contact Craig


You Might Also Like

Other articles filed under Investing

Sorting Through the Market Shifts

February 7, 2018
Yesterday evening, Rockbridge's own Ethan Gilbert, CFA was featured on our local Spectrum news network. Check out the interview below where Ethan discusses the recent market shifts, how these swings can affect your retirement accounts, and how to protect your...
Continue Reading

When Investing, Don’t Think About the Patriots

January 24, 2018
This past weekend, the New England Patriots did it again. Down 10 in the 4th, star quarterback Tom Brady orchestrated two scoring drives to pull off another comeback victory. In two weekends, the Pats will try to win their 3rd...
Continue Reading

Market Commentary – January 2018

January 23, 2018
Stock Markets Returns from various stock market indices over several periods ending December 31, 2017 are shown below. The past quarter was good for stocks – REITs lagged. Over the past year, returns from stock indices, especially emerging markets, were...
Continue Reading

Ten Best Financial Practices to Jump-Start Your New Year

January 19, 2018
Happy New Year! Now that 2017 is a wrap, one of the best presents you can bestow on yourself and your loved ones is the gift of proper preparation for the rest of the year. Want to get a jump-start...
Continue Reading

A Look at the New U.S. Tax Law

January 16, 2018
As you are likely aware, Congress has recently passed significant changes to the tax law. These changes are effective beginning in tax year 2018, with many of the changes for individuals set to sunset after 2025. The summary below is...
Continue Reading

‹ Back to Blog Home

getting started is simple

315.671.0588 info@rockbridgeinvest.com Schedule a meeting Sign Up for Our Newsletter