Long-Term History Characterizes Risk and Return

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Looking over the long term, David Booth, one of the two co-founders of Dimensional Fund Advisors, reviews the history of the stock market and highlights the importance of time, not timing, in the achieving long term investment success.

The bar chart below shows how a passive investor in a balanced 60/40 portfolio did after various market crises. The results consistently showed a healthy gain after five years (or four years in the case of the Lehman bankruptcy in September, 2008). Selling out in response to a market crisis is usually not a good idea.

IFA’s founder and president, Mark Hebner, produced the following video to help investors avoid being sucked in by the gloom and doom that is so pervasive in the financial media.

The history of several U.S. stock markets is captured in the figures below. In essence these charts capture the effectiveness of capitalism over the last 85 years. The numbered events in the first chart are taken from the historical events in the table below it, titled “Market Turmoil and the Dow Jones Industrial Average.” Also note that the value of a dollar scale is a log scale, so each unit increases by a factor of 10. These are indexes and therefore the growth of a dollar does not reflect any fees or transaction costs. Despite several setbacks, capitalism continues to work. This long-term history of quality data allows investors to create the best set of probabilistic estimates of future performances of these indexes.


The five charts below show how the stock market performed before, during, and after historical recessions. A market timing strategy based on the anticipation of recessions (even if you had perfect forecasting ability) would have been of no value.