A friend recently told me she invested $5,000 at the start of this year into the S&P500 and it is up 7% already.
I replied that we should prepare for a drawdown.
No it’s not that I have a crystal ball.
Nor do I believe we’re currently in a bubble territory or anything like that.
Sure, some sectors might feel a bit overheated, but overall, the market’s temperature isn’t off the charts.
It’s just the nature of how the stock market works.
If we look at the three-year period from 2021 to 2023, the S&P500 annualized return was a solid 10%.
But here’s the thing, it wasn’t a smooth 10% rise every year.
Here’s how the S&P500 delivered its 10% return over three years:
2021: +29%
2022: -23%
2023: 29%
Here’s something that will knock your socks off: between 2001 to 2020, the S&P 500 returned an average of 7.5%. Yet, according to JP Morgan’s research, the average investor only saw returns of 2.9%.
Why is that?
Investor Behavior.
It’s easy to buy when the market is up. To regret not having invested more money. Perhaps, regret not doing the unspeakable—leverage.
The real test come when the inevitable drawdown arrive.
How we behave, and whether we have the discipline (and guts) to continue dollar cost averaging into stocks.
If you have friends who have only recently started out with investing, forward this post to them.
Bull markets are easy. It’s how we behave during drawdowns that matter.
Invest safely,
Thomas
P.S.
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