Some investors who were lucky enough to buy at the recent market bottom will be happy with their recent returns. After all, the S&P 500 has risen by around 8% since reaching its lowest level in over 18 months in mid-June. Indeed, some investors may believe that the worst is now over for the stock market and they can look ahead to further strong capital gains over the coming months.
However, the stock market’s short-term performance is highly unpredictable. Just as it fell heavily in the first half of the year, it could easily move below its mid-June level over the coming weeks. Indeed, the current bear market is only around two months old. This is around a fifth of the average length of historical bear markets. Investors' excitement about the short-term could therefore prove to be extremely premature.
A long-term horizon
In my opinion, short-termism is inadvisable when investing. Unexpected events can easily impact the stock market’s performance in either a positive or negative way. Therefore, investors should adopt a long-term view when determining whether their portfolio’s performance has been a success. Otherwise, they may jump the gun in terms of declaring their exceptional ability in market timing before they have experienced a range of market conditions.
Similarly, investors who purchase shares now in the expectation of a recovery should not become disillusioned if they experience paper losses. It is impossible to find the true "bottom" of the market when it is in decline. Investors should instead focus on finding high-quality companies at attractive prices and not judge their returns based on a very limited time period. In fact, it is often better to wait at least five or 10 years before judging whether a long-term investment has been successful.
This view has previously been highlighted by Oaktree Capital founder Howard Marks (Trades, Portfolio). As he once said, “Returns over short periods of time says very little about the quality of investment decisions.”
Controlling emotions
Clearly, it is difficult to keep emotions in check following a period of strong, or weak, performance. Investors naturally feel happiness or sadness when their portfolio makes or loses sums of money that they have worked hard to accumulate in the first place.
In my opinion, focusing on the past performance of the stock market can help investors to put their short-term returns into perspective. The stock market has experienced 27 bear markets since 1929 that have occurred approximately every three years on average. Therefore, investors should think twice before becoming overly confident about the short-term performance of their portfolios. Short-term changes have quickly and frequently dissipated in a short space of time in the past.
Historically, bear markets have lasted for just 10 months on average, and the overall U.S. stock market has produced a double-digit annualized total return over the past 30 years. Therefore, investors should take comfort in knowing that any portfolio declines are likely to be temporary as long as they hold high-quality companies that have the capacity to fully recover over the long run.
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