Apr 10, 2025

Is This Time Different?

When markets feel as shaky as they do now in the US, it is normal to ask: Is this time different?

After all, the S&P 500 Index is down some 4% already this year and there is considerable economic uncertainty. But anxious investors today should consider where the market was five years ago, and how well those who tuned out the noise performed.

Lessons from Recent History

Then, the COVID-19 pandemic had spread rapidly, and the US stock market dropped 34% in just 23 days—faster than ever before.1 The VIX index, a measure of investor expectations of volatility often called Wall Street’s “fear gauge,” hit a record high.

Yet within a year, the market had not only recovered, but also risen 78% from its lowest point. People who sold during the panic missed one of the strongest recoveries ever. Each uncertain period brings its own unique challenges, making it more difficult for investors to keep the faith.

Every Crisis Feels Unique - But Patterns Persist

When I talk with investors today, some point to government debt, global tensions, or new technologies—all of which are valid concerns. But history shows us that markets have overcome every previous “unprecedented” challenge. The Great Depression, world wars, the inflation crisis of the 1970s, Black Monday in 1987, the Great Recession of 2008—markets have weathered them all.

Each crisis can feel like the end of the world when it happens, yet the pattern of recovery stays remarkably consistent. Over 50 years of working in finance has consistently shown me two things: We cannot predict the future, but despite that uncertainty, markets have eventually bounced back.

The Cost of Missing the Market's Best Days

There are no guarantees, of course, but that is the way it has worked historically. When markets swing wildly, our instinct is to act to protect ourselves. Some investors respond by pulling their money out until things “calm down.” But this instinct typically results in lower returns than if you did nothing.

The impact of being out of the market for just a short period of time can be profound. Consider a hypothetical investment in the stocks that make up the Russell 3000 Index, which is a good benchmark for the broad US stock market.

A $10,000 investment made in 2000 turned into $66,038 for the 25-year period ending December 31, 2024. Over that same period, if you miss the Russell 3000’s best week, which ended November 28, 2008, the value shrinks to $55,114. Miss the three best months, which ended June 22, 2020, and the total return dwindles to $46,554, roughly losing 30%.2

Responding with Discipline, Not Emotion

This does not mean you should never alter your investment mix. The key is knowing the difference between thoughtful changes based on your life events and hasty decisions driven by scary headlines. The first is smart financial planning; the second is more like gambling.

Risk, Reward, and Resilience

Companies are constantly seeking to solve problems and create opportunities. Some ideas may take off. Others may not. Investors are rewarded for taking on some of that risk. And because the risk is spread across literally thousands of companies, the stock market has positive expected returns even during stretches when the overall economy slows.

Markets have returned on average about 10% a year, which seems like a fair return, given the level of risk taken on. Successful investing is about picking the right portfolio—and having the right mindset. A disciplined approach helps you handle uncertainty without freezing up.3

Three Principles for Long-Term Investors

I have found that it helps to first, accept uncertainty as the cost of opportunity—higher expected returns are your “reward” for taking on greater risk. Second, it is important to match your investments with your life, not the news cycle. Third, find partnerships, not predictions. Working with a trusted financial advisor can help you create a personal plan that fits your goals and aligns with your values. I believe that understanding how markets work leads to better decisions.

Perspective Over Prediction

Investors who grasp how markets function are more likely to stay in their seats during periods of volatility and reap the potential rewards of compounding. An investor who put $10,000 in the S&P 500 at the beginning of 1970 and simply let it ride would have more than $3 million today despite living through eight recessions, multiple wars, political upheavals, and technological revolutions that transformed entire industries.4 That is not because they were lucky—it’s because they recognized that the question is not whether uncertainty will appear, but how we respond when it does.

Written by David Booth, Founder and Chairman, Dimensional Funds Australia.

 

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1. In USD. S&P data © 2025 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Decrease of 34% was from Feb. 19, 2020, to March 23, 2020.

2.Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. In USD. For illustrative purposes. The missed best day(s) examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best day(s), held cash for the missed best day(s), and reinvested the entire portfolio in the S&P 500 at the end of the missed best day(s). Annualized returns for the missed best day(s) were calculated by substituting actual returns for the missed best day(s) with zero. S&P data © 2025 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Data is calculated off rounded daily index values.

3. In USD. Based on S&P 500 Index annual returns, 1926–2023.

4. Past performance, including hypothetical performance, is no guarantee of future results. Growth of $10,000 is hypothetical and assumes reinvestment of income and no transaction costs or taxes. The analysis is for illustrative purposes only and is not indicative of any investment. S&P data © 2025 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment.

 

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