In today’s podcast I want to talk about expectations and the recent market volatility and give you some historical data to help put some of this recent volatility into context.
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Articles, Links & Resources:
Russell 3000 Index
Do Downturns Lead To Down Years?
Federal Reserve Holds Interest Rates at a 23 year high – Fox News
Bank of Japan Rate Increase – The NY Times
US jobs data ‘flashing red’ as poor growth sparks Wall Street sell-off – The Guardian
Apple shares drop nearly 5% after Warren Buffet’s Berkshire Hathaway slashes stake by half – CNBC
Magnificent Seven’ stocks shed over $600 billion during selloff – Nvidia hit hardest – Fortune
Big Tech Selloff Slams Nasdaq With Worst Day Since 2022
Transcript:
434 Managing Expectations and Embracing Volatility- Insights from 20 Years of Market Data
Announcer: [00:00:00] Welcome back America to Sound Retirement Radio, where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence, and freedom as you prepare for and transition through retirement. And now, here is your host, Jason Parker.
Jason Parker: America, welcome back to another round of Sound Retirement Radio.
You’re listening to episode number 434. The title is Managing Expectations and Embracing Volatility. Insights from 20 years of market data. But I always like to start the day by renewing our mind. And a favorite verse of mine is Philippians 4, 11. I am not saying this because I am in need for, I have learned to be content, whatever the circumstances.
I’m personally still learning to be content, but, and of course, a joke to share with the grandkids. Why did the kid throw his clock out the window during summer vacation? Because he wanted to see time fly. [00:01:00] What do you call snowman in the summer? A puddle. The last couple of weeks have seen a lot of volatility in stocks.
One of the headlines from fortune said magnificent seven stocks lose 600 billion in global sell off. And the wall street journal had a headline that read big tech sell off slams NASDAQ with worst day since 2022. In today’s podcast, I want to talk about expectations and the recent market volatility and give you some historical data to help put all of this recent volatility into context.
Here are a few quotes I thought you might enjoy. Expectation is the root of all heartache, says William Shakespeare. The Stoic philosopher Epictetus said, it’s not what happens to you, but how you react that matters. Benjamin Franklin said, content makes poor men rich, discontent makes rich men poor. Bye.
And Charlie Munger said the big money is not in the buying and selling. But in the waiting, I found that wrong [00:02:00] expectations about the stock market can lead to feelings of discontent, which can then in turn cause unnecessary suffering, including worry. So how can we think about the stock market in a way that fosters contentment and avoids unnecessary suffering?
One effective approach is to look at historical data to inform our understanding of future expectations. An important question to consider is what are your expectations regarding investing in the stock market? How do you react to short term negative headlines or volatility? Establishing a solid investment strategy is challenging when emotions run high.
So it’s wise to have a volatility game plan before negative headlines or short term volatility derail your progress. In today’s podcast, I want to help reset your expectations and hopefully make it easier to accept the volatility of investing by embracing this volatility. We increase our chances of achieving investment success, which can lead to better investment outcomes, which can lead to more money to spend in With the added bonus of [00:03:00] a more worry free life.
Before we analyze the historical data, let’s review some of the recent headlines contributing to the current volatility. Number one, the federal reserve decided to hold interest rates at the high level of 5. 25 to 5. 5%. Number two, the bank of Japan announced a rate increase. Number three, unemployment in the USA rose to 4.
3%, nearly a three year high. And number four, it was reported that Warren Buffett sold 50 percent of his stake in Apple and he now holds 277 billion in cash. So now that we understand some of the factors contributing to the recent volatility, let’s use history to inform our outlook. We will look at the annual performance of the Russell 3000 index from 2004 to 2023.
The Russell 3000 index is a broad measure of the overall U S stock market, encompassing 98 percent of the investable U S equity market. And you might be surprised to learn that over the last 20 [00:04:00] years, There hasn’t been a single year for the Russell 3000 index without downside volatility, so let’s examine the steepest decline each year and compare it with the annual return of that same year.
In 2004, the largest entry year decline was negative 8%. The annual return was positive 12%. In 2005, the largest decline was negative 7%. The annual return was positive 6%. In 2006, the largest entry year decline was negative 8%. That year, the positive annual return was positive 8%. Plus 16%. In 2007, the largest inter year decline was negative 10%.
The annual return was positive 5%. In 2008, the largest decline was negative 49%. The annual return was negative 37%. In 2009, the largest decline was negative 27%. The annual return that year was positive [00:05:00] 28 percent. In 2010, the largest decline was negative 16 percent. That same year, the annual return ended up being positive 17 percent for the year.
In 2011, the largest entry year decline was negative 20 percent. The annual return for that year was positive 1%. In 2012, the largest intrayear decline was negative 10%. The annual return was positive 16%. In 2013, it was a negative 6% and a positive 34% for the year. In 2014, it was a, a negative of negative 8% was the largest drawdown.
The annual return was positive 13%. In 2015, the largest intrayear decline was negative 12%. The annual return for that year was positive half of one percent. In 2016, the largest entry year decline was negative 11 percent. The annual return was positive 13 percent. In [00:06:00] 2017, the largest entry year decline was negative 3 percent.
The annual return was positive 21 percent. In 2018, the largest entry year decline was negative 20 percent, and the annual return was negative 5 percent. In 2019, the largest entry year decline was 7 percent, and the annual return for the year was positive 31 percent. In 2020, the largest entry year decline was negative 35 percent.
The annual return was positive 21%. In 2021, the largest entry year decline was negative 5%. The annual return was positive 26%. In 2022, the largest entry year decline was negative 25%. And the annual return was negative 19%. And then in 2023, the largest entry year decline was negative 11%, but the annual return was positive 26%.
And here are a few highlights after reviewing this data. Many years with large entry year [00:07:00] declines saw positive annual returns. In 17 of the last 20 years, U. S. stocks ended up with gains for the year. And number three, the Russell 3000 index lost 7. 6 percent from July 19th to August 6th, 2024, despite the recent volatility as of August 6th, 2024, the Russell 3000 index was 9.
26 percent positive year to date. In summary, volatility is a natural part of investing in the stock market and should not cause panic or discontent. Many years with large entry year declines were followed by positive annual returns. Having realistic expectations for a long term investment approach can help mitigate negative emotions from short term market fluctuations.
Historical market trends can set more realistic expectations. By looking at past data and trends, we can better understand how the stock market behaves over time. Helping to mentally prepare for potential ups and downs in the stock market. Unrealistic or uninformed expectations about [00:08:00] investing in the stock market can lead to discontent when faced with a negative market volatility.
It’s important to have realistic understanding of how the stock market works, a long term investment approach, and a diversified portfolio to mitigate negative emotions. Remember, investing is a marathon. It’s not a sprint to deal with market volatility, embrace asset allocation and broad global diversification and avoid concentrated risk in just a handful of companies.
Ensure that you have a financial plan to help you see how volatility impacts your specific plan. Reflecting on the past can prepare you for future volatility and give you peace of mind as an investor. The key is not timing the market, but rather time in the market that has shown to produce favorable outcomes.
Announcer: Thank you for tuning in to Sound Retirement Radio. For articles, links, and resources from today’s show, visit soundretirementplanning. com. If you enjoy the podcast, share it with a friend and give us a thumbs up. Five star review. [00:09:00] Ready to kickstart your retirement planning? Head over to retirementbudgetcalculator.
com. Need assistance with investment management? Explore our services at parker financial. net. Information and opinions expressed here are believed to be accurate and complete. For general information only and should not be construed as specific tax, legal, or financial advice for any individual. and does not constitute a solicitation for any securities or insurance products.
Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, its representatives, or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance related discussions are subject to the claims paying ability of the company.
Investing involves risk. Jason Parker is the president of Parker Financial, LLC, an independent fee based wealth management firm located at 9230 Bayshore Drive, NW, Suite 201, [00:10:00] Silverdale, WA. For additional information, call 360 337 2701 or visit us online at soundretirementplanning. com.
