The occasion to revisit this perennial question is the approaching first anniversary of the bull market that began in October 2022. Imagine Rip van Winkle falling asleep one year ago, checking the stock market’s level right before he dozed off. If he were to wake up today and check the market, he’d probably yawn and fall asleep again with a contented smile on his face. The S&P 500 SPX has produced a total return of 17.6% since then.
An even more compelling thought experiment is to imagine a Rip van Winkle who fell asleep five years ago. He would be blissfully unaware of the intervening global pandemic, the Russian invasion of Ukraine, and other earth-shattering events such as who Taylor Swift is dating. If he were to wake up today he’d see that the S&P 500 had produced an annualized five-year total return of 10.0% and then fall back into a peaceful asleep.
The investment implication would seem to be to never look at how your investments are performing over short-term periods. But that is unrealistic advice for almost all of us, since it’s nearly impossible for anyone following the news not to notice how the markets are doing. Economic news used to be relegated to the business section of the newspaper, but more often than not now appears on the front page.