I love this quote from Morgan Housel:

“Volatility is the cost of admission to market returns.”

In simple terms: large declines are the price of admission for long term investors. You have to experience some downside to earn your upside.

You can’t have long term gains without declines along the way…

Long term gains and declines

We’ve had fifteen bear markets since 1950, with an average decline of 30%, lasting just under a year to reach the bottom. After a few short-lived bear markets (2011, 2018, and 2020), the current bear market is getting closer to the historical averages.

The bad news about declines in the stock market is you never know how long they will last. The good thing is they offer an opportunity to buy at lower prices.

As a long-term investor, I’m planning on experiencing at least 10 or more bear markets. There will also probably be at least 8-9 recessions in that time, maybe more.

This is just an estimate. You can never be sure of anything when it comes to the markets or economy, but you can use history as a rough guide. From 1970 – today, there were 9 recessions, 11 bear markets and 5 market crashes with losses in excess of 30%.

Despite these declines, the stock market has generated an annualized return of roughly 10%. This has outpaced the returns for more conservative investments like bonds (5%) and cash (3%).

The premium you earn from owning stocks over bonds/cash is primarily due to the higher volatility and drawdowns you must stomach over time.

If your goal is long-term growth, stocks are still your best option. As you get older, it makes sense to diversify into more conservative investments.

Bottom Line
It’s tempting to believe you could sidestep these losses, receiving all the upside without any of the downside. But no one has shown the ability to do so in a repeatable fashion.

Avoiding volatility may sound good in theory, but volatility is the price admission for superior long-term returns.

Sources / Disclaimers:

Chart created by George Maroudas. Data source YCharts. Stock market represented by the S&P 500 index total return.

Cash represented by the 3-Month Treasury Bill because it is regularly quoted as the risk-free rate for U.S. investors.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.