Pushing A Rock Up A Hill
A lot of people came into 2014 thinking that after such a strong year for equities, the indices were due for a pause.
Looking at the data tells us a different story. There have been eighteen instances since 1921 that the Dow Jones Industrial average was up at least 25% (including last year). The average annual return following these periods has been 11.81%, nearly 50% higher than the 7.93% average we have seen over the last ninety-three years.
Looking at the data makes a few other interesting points:
Double digit returns are the norm, not the exception. The Dow is almost 3x more likely to be up 10% or more than up single digits.
On average, one in five years the markets are up at least 25%
The Dow has been up double digits 51% of all calendar years.
Just as strength begets strength, weakness begets weakness. The average return for the year following a 25% loss was just 1.91%, ~75% less than the 93 year average.
It?s important to remember these numbers are just averages. Markets don?t follow a schedule, often going through periods that don?t rhyme or reason. Consider that since 1921 there have only been five years when the market has been right near the average return of 7.93%.
Using a normal bell curve, we can say that 68% of the time, annual returns will be between -11.5% and 27.4%, which is a pretty huge range that doesn?t inspire much confidence. However, we can say with plenty of confidence that if you had to set your portfolio on auto drive, it pays to be long stocks. Don?t try and push a rock up a hill.