Exactly a year ago, on 23 March 2020, the S&P 500 index bottomed at 2,237 points.
Since then, the US-centric index has risen 76% to 3,941.
Looking back, here are three main lessons investors can take away from the stock market crash and the subsequent recovery.
1. Timing the Market Is Futile
I still remember during the depths of the crash that investors were talking about waiting to enter the market since the pandemic was still raging and the world economy was in shambles.
While it sounds logical to just wait out and invest when things are better, it’s not so clear-cut.
We can never know for sure when the recovery will happen.
And when recovery takes place, it can be swift. That’s what exactly happened last year, taking many investors by surprise.
What we can learn from this is that market timing is a fool’s errand.
Various studies have shown that being out of the market and missing the best market days can significantly reduce long-term returns.
For instance, a research by Morningstar shows that for a 20-year period from 1996 to 2016, the S&P 500 index averaged an annual return of around 8%.
A $10,000 initial investment would have given around $44,000 at the end of 2016.
However, if an investor had missed out on just the 10 best days of the 20 years, the average return would have halved to about $22,000.
What investors should do is to continually invest through the market falls. As Warren Buffett once said, “If you wait for the robins, spring will be over.”
2. Volatility Is Normal
“The stock market is the story of cycles and of the human behaviour that is responsible for overreactions in both directions.”
Seth Klarman
Since closing at a then-record high of 3,386 points on 19 February 2020, the S&P 500 index plummeted 34% through to 23 March.
It sounds scary, but we should understand that stocks are inherently volatile.
From 1950 to 2019, the average drawdown of the S&P 500 was 13%, with the maximum drawdown at close to 50%.
The next time such volatility happens again, we have an understanding that it’s not unusual and is part and parcel of investing.
3. Always Have the Long-Term In Mind
Time and again, the stock market has shown that it recovers after a crash.
Over the past 69 years, from 1950 to 2019, despite all the market crashes and volatility, the S&P 500 has gone up and to the right (as seen from the chart earlier).
During the time frame, the index produced a return of around 7.8% per annum. Including dividends, it has increased by some 11% annually.
What this shows is that when it comes to investing, we should always focus on the long-term and use short-term volatility to our advantage.
SudhanP.com 