Taking a Step Back
It’s hard to appreciate any artwork up close. While the detail is clear, you can miss the grander design. Taking a step back, however, opens up the bigger picture. A similar change of perspective can help investors in dealing with market volatility.
Up close, the market can look messy. Between January 2001 and December 2023, the S&P/ASX 300 Index finished each day with a positive return only 54% of the time. So the odds that stocks would be up or down on any given day were a little bit better than a coin toss.
Now, let’s take a step back. If we look at the market on a full-year basis, the picture improves dramatically and the virtue of patience becomes clearer. Over the same 23-year period, the S&P/ASX 300 ended the year with a positive return more than 78% of the time.
Of course, the market never appears to move upwards in a straight, uninterrupted line no matter how far you step back. There will always be jagged periods. For instance, the positive yearly return for 2020 does not make the big swings we felt around the pandemic go away.
Experiencing volatility in real time is not easy. The Australian stock market posted intraday losses of 1% on more 621 times in that 23-year period, or more than 10% of the time. On a monthly basis, returns were negative 36% of the time or 30% on a quarterly basis.
But the fact is, the closer up you view the markets day to day, the harder it can be to take in how wealth is built over longer time-frames. For all those volatile periods over the past two decades, the Australian stock market posted a six-fold increase in value in that time.
That’s the virtue of occasionally taking a step back and seeing the bigger picture.
Exhibit 1
Perspective Matters: Periodic Performance
1 January 2003 – 31 December 2023
Source: Schneller, Warwick. “Taking a Step Back.” Dimensional, 05 Sept 2024, https://my.dimensional.com/xlink/EREvDU3TBx3bVpPO3siyapKE73j2GsWb09NWXZIKHugEpohM08U10bgNXXQYn1HK1Prgxlxf22eaNLsppTtxpnj5npeqYSV-Ty_rfZeSBHQl80U2-hYyRkPHCGTP5HU7Zk7LRgGylxWrEXtBg7FttQ2?_cldee=1G9kAnXSnnvN1Umk_1NGKr9f1wPbV0qHA79MnfHgjdU5MhXOE84K8JeOpfdIdePS&recipientid=contact-175523919c7ae61180ddc4346bac0934-25d9745391044839b8101cbb50e48803&esid=67e0c055-0770-ef11-a671-000d3a3bdbd5
