Improving Investor Behavior: We planned for this

With the holidays rapidly approaching, I find late December is a great time for family, friends, festivities, and a little reflection. The end of 2024 marks an important milestone: The first quarter of this century is now behind us. If you’re like me, the turn of the millennium doesn’t feel that long ago, yet the disco era is now closer to the year 2000 than we are.

Time has a way of moving quickly, and constant change makes history easy to forget. But financial markets reflect an interesting way of remembering the past. The volatility we all experience is charted up and down, measured and assessed, day after day. While it’s not a perfect measure for historical events, it does illustrate where our collective “financial heads” were at any point.

Over the past few weeks, I’ve had several conversations regarding the recent gains of the broad markets, and people’s concerns for a resulting downturn. “What goes up must come down,” right? While I empathize, I look to history to guide our expectations. Eventually yes, markets will shift downward. This shouldn’t surprise frequent readers of this column. Downturns are a normal part of investing, but historically they are always temporary. The recent unsubstantiated worry is just fear, plain and simple. Instead of wringing your hands with what-ifs, choose to gain perspective from history.

For example, if you were born before the year 2000, you’ve already been through two of the largest market corrections ever and lived to tell the tale. Do you remember the four bear markets of the last 25 years?

March 2000 – October 2002: S&P 500 down 49.1% in 929 days

Following a massive run-up in equity prices in the late 1990s, the popping of the dotcom bubble saw the S&P 500 lose almost half its value over approximately two years. Spurred by the mass adoption of the internet, companies promising anything with “.com” on the end were receiving enormous evaluations. The NASDAQ, the epicenter of this madness, went down some 80%!

October 2007 – March 2009: S&P 500 down 56.8% in 517 days

The Great Recession represents the biggest bear market of the past 25 years and the second largest ever behind the Great Depression. The panic around the overnight bankruptcy of Bear Stearns, one of the oldest U.S. banks, forced the government to intervene and “bail out” several of the nation’s largest banks. The resulting credit freeze brought a meltdown that ultimately crushed the speculative value of single-family homes worldwide. The market tanked and along with it, the job market.

February 2020 – March of 2020: S&P 500 down 33.9% in 33 days

This bear market — notably the shortest of all time — was a response to the COVID-19 global shutdown. Not just a financial panic, this existential event required the world’s governments to initiate massive and unprecedented fiscal and monetary intervention to arrest the decline. This monetary stimulus would contribute to the next bear market just two years later.

January 2022 – October 2022: S&P 500 down 25.4% in 282 days

Speculative investment driven by ample stimulus dollars and a dramatic increase in the available money supply (about a 40% increase over a two-year period) created a firestorm of inflation, the scale of which hadn’t been seen for 40 years. The Federal Reserve reacted by raising interest rates further and faster than in its 100-year history.

These four dramatic drops plummeted investor portfolios everywhere. Yet patient long-term equity investors were still rewarded. A $100,000 investment left untouched in a S&P ETF in 1999 would be worth more than $600,000 today. That’s an average annual return of 7.6%, just under the long-term historical average of about 10%. All these investors had to do was, well, nothing.

Over that same period, the cash dividend of the S&P rose from about $16 in 1999 to around $76 today, roughly a 4.5 times increase. The Consumer Price Index (CPI), a method for measuring inflation and prices of everyday items, increased approximately twofold. The lesson is simple: Everything got more expensive, but a growing dividend income outpaced those rising costs. That’s why we’re such big fans of dividends and the companies that pay (and grow!) them.

The enduring value of innovation and the companies that work toward it, even during panic-driven crashes, continues to reward steadfast investors. A clear plan and strategy remind us: We planned for this. Despite election outcomes, earnings reports, unexpected inflationary or jobs numbers, social or political unrest, or even a war breaking out — we plan for uncertainty.