THE CONSISTENTLY INCONSISTENT STOCK MARKET

The stock market is the best place to invest for the long term — generating annual returns of around 10% over 20- or 30-year periods. Unfortunately, those returns are far from consistent in the short term.

So how inconsistent are they?

To answer that, let’s look at the annual gains for the S&P 500 over the last 30 years (1995–2024). This period is particularly interesting because it includes:

• two massive bull markets

• two devastating bear markets

The chart above shows the annual returns for each of those 30 years. (Returns exclude dividends.) Over the entire period, the average annual return was roughly 10%.

Consistently inconsistent, right? Few individual years land anywhere near that average.

The "experts" tell us that the stock market is rational - that it is continuously repricing based on the most current and complete information. They also suggest that the market is forward looking and focused on the long-term future. The data suggests that the opposite is true.

Sorting the yearly returns from best to worst provides additional insights.

• 20 of the 30 years delivered gains of 10% or more.

• 5 of the 30 years delivered losses of 10% or more.

This is the reality of stock market investing:

• Most of the time—about two out of every three years—the market posts sizeable gains.

• A small percentage of the time—roughly one out of every six years—investors endure large losses.

• The remaining years deliver modest or flat results.

Stock market gains should not be this inconsistent. After all, the underlying businesses are far more predictable. The companies in the S&P 500 typically grow profits by 8% to 9% per year, with only rare down years where profits fall by 15% to 20%. Sales and profit growth are usually steady.

It’s not business results that create wild market swings—it's human emotion.Investors repeatedly overreact to both good news and bad news. Excessive pessimism (fear) drives stock prices far below fair value, while excessive optimism (greed) pushes them into the stratosphere. As long as humans make investment decisions, volatility will remain the norm.

Of course, this volatility makes investing uncomfortable. We all love the 20% up years, but those 25% down years are painful.

The investment industry’s traditional solution is simple: buy and hold. Ride the market up, and hold on for dear life on the way down. They often suggest adding low-yield bonds for “protection,” even though bonds offer meager 3% returns—and, as we saw in 2022, bonds can lose money too.

If you’re satisfied with annual returns of 7% or less, then the standard advice works fine.

But I wasn’t satisfied with “buy and hold.” Watching my stocks drop 40% in a few months seemed dumb. And I’ve never liked bonds—weak returns and real downside risk.

So instead, I decided to embrace market volatility.The stock market cycles through well-defined patterns. Using the same investment approach in every cycle never made sense to me.

I built a data-driven model that identifies these market cycles and adjusts the investment strategy accordingly—investing aggressively (100% in stocks) during growth cycles and moving out of stocks during downturns.

The result: You can capture big gains and avoid big losses.

Below is the distribution of annual gains from my system over the same 30-year period. Losses still occur—no system can eliminate them—but they can be significantly reduced, and without sacrificing strong returns in the up years.

Stay Disciplined My Friends,

Phil

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Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.

Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.