The Starting Point Matters A Lot


“Experience is a comb life gives you after you lose your hair.” – Judith Stern

After stocks’ worst-ever start to a calendar year, now is a good time to remind ourselves why investors volunteer to persist through this hair-raising volatility.

Why own stocks?

Reason #1 – Growth well ahead of inflation: across a broad menu of investment choices, stocks have a strong long-term performance track record, returning about 10% annually since 1926.

Reason #2 – Stock prices trend upward over the long-term: the historical probability of a profit across most investors’ long-term time horizons is high, as can be seen in Exhibit A.  (Click on the chart for better viewing)

Exhibit A - Historical Probabilities of a Profit

If stocks are so great, then why do investors feel so behind?

  1. The starting point matters a LOT: the so-called 10% expected return is impressive, but in-the-moment results vary greatly.
Your personal mileage will vary

Time in the market is critical to compound returns over very long-term time periods.  However, just because the EPA rates a vehicle for 28 miles-per-gallon (MPG), personal driving habits, unpredictable traffic and messy road conditions mean “your personal mileage will vary!”  Begin the journey on a newly-paved, straight-line road with zero traffic and miles-per-gallon will soar above that average number.  Get caught in rainy-day gridlock, or spend time on gravel roads dodging potholes, and 17 MPG might be a good day.

  1. Remember this: average or median signals that a given number is in the middle of a pack. Roughly half the other numbers are higher, and half are lower.  A starting point with recent “above average” history indicates that – whether we like it or not – returns have a good chance of being “below average” at some future point.

Fortunately for stock investors, after a miserable start to 2020, the reverse may also be true.

Take a look at the two charts below, Exhibits B and C.  The arrows point to select years when an investor might have begun to invest for the first time or otherwise started the clock ticking on a measurement period.  The down arrows mark years after big run ups in stocks; “the train is leaving the station, investors better get on now!”

(Click on the charts for better viewing)Exhibit B S&P 500 5 Year ReturnsCQ-Blog-Exhibit-CExcept that instead of continued above average gains, those investors experienced the opposite of what had been a recent norm: after several years of big gains, it was hard to make money in stocks, and the expectation of 10%+ annualized returns vaporized.

Fast forward a few years into the midst of those below-average return periods.  At the very time when recent experience convinced many investors that stocks were a loser’s game, the curtain was rising on a new bull market.  After demoralizing declines, the up arrows mark years when stock investors were on the cusp of terrific, above-average, annualized performance.

Hold on to this encouragement as you study the table below for what a difference a single quarter can make:


Point #1: the inclusion of a single quarter of big up or down returns has significant impact on short measurement periods.

Point #2: the impact of any one quarter is modest in the context of longer time frames.

  1. Weakness begets strength. Ned Davis Research observes that, since 1926, when the S&P 500 Index has declined at least 15%, the following quarter sees the index climb “67% of the time by a median of 5.8%.  One year later, the median gain is 17.3%.”

It will be a while yet before we can say March 23, 2020 was “the bottom” or only “a bottom.”  With Covid-19 creating real unknowns on a global scale, governments and central banks have pledged to do whatever is necessary, using borrowed money, to keep economies afloat.  It is possible that recent stock market gains are a head-fake, and investors could become concerned about the ability of the governments to fund this new version of the status quo.

Our takeaway is that unless the global economy is entering a depression, then the stock market was deeply oversold in late March and had priced in a lot of bad news.  At the moment (April 9, 2020) stocks may be short-term overbought and  near-term vulnerable to unexpected negative news.  Ultimately, equity prices look ahead and  are likely to move higher in anticipation of subsiding coronavirus worries and resumption of global economic activity.



  • Christine Quillian

    Christine manages portfolios for individuals, families, and institutions, and devotes much of her time to investment research. She uses macroeconomics and industry-specific analyses to identify strong businesses that are attractively priced.