While the U.S. stock market has returned an average of about 8% annually over the past several decades, that does not guarantee an 8% return each year. Long-term investors know that the timing, or sequence, of the returns is everything.
The sequence of investment returns is important even over shorter timeframes. This is evident if you look at the stock market this year, which is up about 13%.
With a slew of negative headwinds facing the U.S. and global economies alike, it’s understandable for investors to be hesitant about jumping in to the market head-first on January 1, 2013.
Yet, investors that ponied up on the first trading day of 2012 enjoyed a nice rally in the first quarter of the year. The S&P 500 was up 12.3% from January 1 to April 1.
This positive market movement gave bandwagon buyers confidence that 2012 was going to be good to stocks. But their hopes were quickly dashed. Anyone waiting until April to buy shares didn’t do so well, as the S&P 500 was down 11% from April 1 to June 1, erasing nearly all of the year-to-date gains that early birds had been enjoying.
Here’s an interesting thing to note: you could have bought the S&P 500 at the exact same price on June 4 as investors paid on January 1. See the S&P 500 chart below.
Of course, everyone who bought in January 2012 felt like a rock star through April 2012. Then they chewed off their fingernails from April to June. We’ll just hope they didn’t sell out when their gains dropped back to their January 1 buy prices. If they had, they would have lost out on the year’s second rally.
The market headed higher starting in June 2012, adding 16.5% by mid-September before the S&P 500 topped out around 1,475. Long investors then suffered through a sell-off of 8% through Thanksgiving. This pullback likely shook out some nervous long investors. But anyone selling out in November missed the recovery rally that brought the S&P 500 well above 1,400 again.
The sequence of this year’s rallies and pullbacks has made it difficult for many investors who don’t know whether to trust the economy – which is still faltering—or the stock market – which is showing remarkable (Fed-stimulated) resilience and strength.
Watch for more of this in 2013 as central banks try their best to “fix” economies and markets.
If you haven’t done so already read the Survive & Prosperissue on “2012: The Lessons of Endless Stimulus.“