A better approach to viewing performance is as a return distribution chart. For example, charted here is the distribution of the 89 annual S&P 500 returns from 1928 through 2016. It is clear from this presentation that there are far more positive years (everything to the right of the yellow bars) than negative years, with a positive return 73% of the time. The most likely annual return over this period was between 10% and 20%, occurring 20 times, or about 1 out of every 5 years. These types of helpful observations are difficult if not impossible to obtain using the typical mountain chart.
S&P 500 INDEX CALENDAR YEAR RETURNS (January 1, 1928 – December 31, 2016)
Source: S&P Dow Jones Indices LLC
Also, noteworthy is how the large positive returns exceed the large negative turns. This latter observation may come as a surprise to many, as large negative returns are emotionally seared into our memory, while comparably sized positive returns are often forgotten or overlooked.
Examining a distribution chart of performance clearly demonstrates that the stock market favors long-term investors. Discussing the market in this way provides valuable long-term perspective. Reframing performance discussion in terms of probabilities helps to avoid some of the pitfalls associated with the mountain chart and is less likely to trigger strong emotional reactions, which when associated with certain events, can result in poor decisions and erroneous conclusions.
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