Do good years follow good years? And bad follow bad?

riskIt seems investor’s may believe that good years follow the good years in the markets; and bad years follow bad market years. But is this true?

Wikipedia has a great historical graph for the S&P 500 (along with a great discussion about the index as well).* What is interesting about the online historical graph is the ability to sort the various columns.

What I wanted to illustrate below, by highlighted various positive and negative years, is that good years don’t necessarily follow the good, or bad follow the bad. In other words, annual changes change just as quickly as daily changes in the markets. What causes that? Unexpected events. Why unexpected? Because the expected events are already priced into market expectations (by definition you could almost say).

Moral of the story: 2013 was a good year. What might 2014 bring? This doesn’t mean make massive changes to your investments. It does mean that you should keep your risk perception in check – in other words, markets don’t always go up, and markets don’t always go down. When you chase returns, they often turn around and bite you by doing the opposite of what you perceived they were going to do!

risk perceptionA great piece that gets to your Risk Tolerance and Risk Perception.  The segment of Michael Kitces blog of interest to client is the last part of his blog starting with the section labeled “Risk Tolerance and Client Behavior” ( Markets May Be Volatile, But Research Shows Risk Tolerance Isn’t! – Kitces | Nerd’s Eye View ).

What you seek to strive for is the portfolio allocation and diversification that you can be happy with during either up or down markets …. why? Because you should expect to see both!

The past is NOT prologue to the future … in other words, the future is more than likely to be different than the past. So don’t count on patterns you think you see – they’ll change – change is the only constant.

*Note: you can’t invest directly in indexes … only through mutual funds or ETFs that are designed to replicate indexes in some form or fashion (design would be described in the prospectus).

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