On these pages, we’ve often used the phrase “a random walk around an upward drift” to describe stock market behavior. This was not original on our part.  The stock market was first characterized as a random walk in 1903 and several academic papers have been published over many decades on the random walk nature of markets. Incorporating upward drift into random walk statistical models was extensively researched by Duke University Professor Robert Nau. The point in providing this background is to say it is well-established that markets appear random but over time drift upward. With a sufficiently long-term time horizon, most investors will experience positive returns from their stock market investments.

Let’s contextualize this with some charts and some data. Here is what this random walk with an upward drift has looked like since the year 2000.

The chart above represents 6,218 trading days through Friday September 13, 2024. Over this nearly 25-year period, the value of the market has increased 286%. Not bad and certainty sufficient for accumulating wealth. But the current beneath the surface that may surprise some is that 53.5% percent of those days was an up-market day. The gains you see in the chart were produced while 46.5% of the days were down! How is this possible? Simply, the days that were up were up more than the down days were down and there were about 442 more up days than there were down days (less than 10% of all days). Here is what those 6,218 trading days look like when strung together on a chart:

The point of drawing this out is to emphasize that the difference between accumulating wealth and not accumulating wealth exists on a razor’s edge. Watching the stock market’s daily returns over some period of 1-2 years without the aid of a computer, it is safe to say most people cannot sense the difference between an upward market and a bear market. For example, in 2008-2009, when the market went down 50%, it still experienced 49% positive days. Walking through the data day to day and without the benefit of a chart, it is very hard if not impossible for an observer to say with any conviction whether the market is trending lower or higher. It is simply too random even when it is trending.

So, what should an investor do? We at WealthPlan emphasize a long-term focus and allocating to markets according to each investor’s long-term objectives and personalized risk tolerance levels. If you find yourself looking at daily results, you might be wise to stop. It also might mean you have an inappropriate allocation to stocks. In any case, if the daily gyrations of market returns have you confused or bewildered, it might be a good idea to sit down with us and have a conversation.

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DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which Investment(s) may be appropriate for you, consult your financial advisor prior to investing. Information is based on sources believed to be reliable, however, their accuracy or completeness cannot be guaranteed.

The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. The S&P 500 index is regarded as one of the best gauges of prominent American equities’ performance, and by extension, that of the stock market overall.

No investment strategy can assure success or completely protect against loss, given the volatility of all securities markets. Statements of forecast and trends are for informational purposes and are not guaranteed to occur in the future. All performance referenced is historical and is no guarantee of future results. Securities investing involves risk, including loss of principal. An investor cannot invest directly in an index.