Keep faith in Rip van Winkle

The stock market experiences significant short-term volatility, but the great mistake is to conflate this with long-term risk.


The Sunday Times 26 August 2018

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On the day I was born the US stock market as measured by the S&P 500 closed at 112. At the end of July this year it stood at 2,802; a multiple of 24 times its 1972 level. But that of course excludes dividends, as most indices do. My lifetime return including dividends is over 96 times ($1,000 invested is now $96,000).

During this time period, the market has experienced short term declines averaging just over 15% every year. In six of those years, there were declines in excess of 25% (roughly every 7 years). Yet the greatest risk to anyone investing during my lifetime in my opinion was not whether they were in the market during these tough declines. Their greatest risk in my opinion was whether they were out of the market for the much more frequent advances.

To the extent that this is a timeframe beyond the grasp of any reasonable investor, then let’s update it. We are approaching the tenth anniversary of the collapse of Lehman Brothers, which filed for Bankruptcy on the 15th September 2008, after which the S&P500 declined by over 40%. Notwithstanding, a dollar invested in the S&P500 on the eve of the collapse of Lehman Brothers would today be worth just over $2.75.

There isn’t a soul on the planet that with the benefit of hindsight wouldn’t want to have invested every last cent in the market on that night in September 2008.

That there are few souls that would have stuck through this during 2008 is the reason why stock markets deliver wealth transfer from the ill prepared to the patient and disciplined.

Stock market investors are generally worried about the wrong things. Sustained in ignorance by financial media that seems to use the word ‘crash’ as a substitute for breathing (a la the coverage that accompanied Facebook’s recent share price decline).

The stock market experiences significant short-term volatility, but the great mistake is to conflate this with long-term risk. There has never been a 20-year period when the S&P 500 didn’t deliver a positive return.

What has been labelled the ‘Rip Van Winkle’ approach bears examination. You may remember from the short story by Washington Irving that Rip went to sleep for 20 years and awoke to a world that was, all at once, shockingly changed and hauntingly familiar.

A Rip Van Winkle review of financial markets over the last twenty years would likely conclude that nothing much has changed. A stock market return of just under 7% p.a. for the most recent twenty-year period (ending July 2018) looks slightly anaemic next to a long-term return of closer to 10%. However, inflation during this period has been considerably lower than its long-term average, resulting in a real (after inflation) return that is close to its long-term average. Familiar?

Maybe the future will be unlike the past. But that’s no different to believing that ‘this time is different’, which we know to be the four most expensive words in investing. This time is never different.

However, I do concede that you need to be prepared for the next inevitable decline. And there’s no better time to prepare yourself for the stock market’s periodic bouts of wealth transfer than when the capital market seas are calm and the financial sky is blue, as they undeniably are currently.

So here’s my tuppence worth (penny-for-your-thought merchants are already on the make!).

We are a full nine years and counting into a bull market and concerns in relation to a stock market downturn are justifiably high. I have no idea when this decline will happen, why it will happen nor how long it will last. Hopefully the foregoing puts forward a thesis that none of these three things matter. If you still think they do, please re-read from the start.

Let’s say your adviser has completed a financial plan, as a result of which you’ve committed to investing for a long period of time. You’re nervous about the timing. By all means, phase money in over a 12 or 18-month period and pray to the financial market Gods that the market declines by 20% or 30% (or even more) during this period.

A market decline for regular investors is the investment equivalent of a 6-inch putt or a lob to the forehand; there’s a chance of missing, but it’s harder than putting it away.

If you were advising Rip Van Winkle, the only rational advice for him before nodding off for 20 years would be to tell him to call his adviser and tell them to put it all into equities.

The ultimate saboteur of long term success is going to be your behaviour during your investment time horizon, not the financial market upheavals that will inevitably accompany it. Get in touch with your inner Rip Van Winkle and leave well enough alone.


The S&P500 return for the five years ending July 2018 was 13% p.a. “SPDR” is a registered trademark of Standard & Poor’s Financial Services LLC (“S&P”) and has been licensed for use by State Street Corporation. STANDARD & POOR’S, S&P, S&P 500 and S&P MIDCAP 400 are registered trademarks of Standard & Poor’s Financial Services LLC. No financial product offered by State Street Corporation or its affiliates is sponsored, endorsed, sold or promoted by S&P or its Affiliates, and S&P and its affiliates make no representation, warranty or condition regarding the advisability of buying, selling or holding units/shares in such products. Further limitations and important information that could affect investors’ rights are described in the prospectus for the applicable product.


Gary Connolly is Managing Director of iCubed. He can be contacted at or on twitter @gconno1. iCubed Training, Research and Consulting, trading as iCubed, is regulated by the Central Bank of Ireland.

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