Stocks are volatile – the chart below shows the return on the S&P/TSX Composite for one year rolling periods each month from March 2016 going back to 1976. Scary stuff right? While there are a lot of good return years, there are a lot of months where you would have lost more than 20% of your money over the next year.
Now instead of 1 year periods, what if we look at 5 year rolling periods? All of a sudden stocks don’t look quite so risky, especially if you think of risk in terms of losing money. As you can see below there are very few 5 year periods over which you would have lost money in the Canadian stock market starting in 1971. Now some of those 5 year periods were negative and even more earned less than inflation but you don’t see the large draw downs you do over shorter time periods.
But many have a much longer time horizon than 5 years – young families saving for their children’s university education, professionals looking forward to retirement down the line, retirees who want to ensure their money will last them for a long stress-free post-retirement period. Investment time horizons are often more than 20 years. The chart below shows rolling 20 year periods starting back in 1956 through until end of March of this year.
There isn’t a single 20 year period where you would have lost money. Now inflation was pretty high in some years, particularly in the 70’s and 80’s but you would never have had average returns below 6%, even if you started in the worst month since 1956. The average 20 year period return is closer to 9%. Now past performance won’t necessarily be repeated and it’s always prudent to be conservative but people shouldn’t let media doom-sayers and short term market volatility spook them into avoiding stocks. If your time horizon truly is short, for example if you know you need a house down-payment in 3 years, then stocks probably aren’t the best place to park your money. But over longer time horizons, average returns are much less volatile. If you have time on your side, and most do, use it and take advantage of the awesome ability of the stock market to compound your wealth over the long run.