A Different Way To Think About Risk

December 17, 2019
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When we think about risk, specifically as it relates to the stock market, we often have either positive or negative emotions based on our own experience or the experiences of people close to us. I hear things like “Never put your money in the stock market, it can’t be trusted.” I also hear things like “I should put my emergency fund in stocks since it earns more than a savings account.” I personally disagree with both statements.

Risk in the stock market is often tied to how long you stay invested. While history is not a guarantee of the future, history does tell a compelling story. Below are the best and worst annual compounded returns for U.S Stocks over varying time periods.[1]

1 Year rolling period

Best: +166.9% (June 1933)

Worst: -69.1% (June 1932)

10 year rolling period

Best: +21.5% (May 1959)

Worst: -6.2% (August 1939)

20 year rolling period

Best: +18.4% (March 2000)

Worst: +1.2% (August 1949)

As you can see, the longer you stay invested, the less volatile the movements are. From January 1st, 1926 through December 31st, 2018, there has not been any 20 year period where US stocks had negative annualized returns. On the other hand, during shorter time frames, there were negative returns. So no, I wouldn’t suggest putting your short term emergency fund in stocks. And no, I wouldn’t suggest staying clear from investing altogether even for your long term savings like retirement.

Disclaimer: Assumes reinvestment of all income and no transaction costs or taxes. All returns are compounded annually. Rolling periods are monthly in frequency. US Stocks are represented by the CRSP Value-Weighted Index of the S&P 500® Universe. Alex Voorhees and Reston Wealth Management do not provide legal, accounting or tax advice. This information is not intended to be a substitute for specific individualized investment, tax or legal advice. We suggest that you discuss your specific situation with a qualified investment, tax or legal advisor. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) or strategies may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss. You should consider the investment objectives, risks, charges and expenses of any investment carefully before investing.

[1] “Time & Risk.” Investments Illustrated, 2019, www.investmentsillustrated.com/bigpicture.php.