Trading Desk: Four Years Of Headaches And Solid Returns

If you’re feeling exhausted after three bear markets in five years, you aren’t alone. The VIX hasn’t really dropped below “elevated” since COVID broke loose in March 2020. That’s a long time to stay on the rollercoaster without a break.

But here’s the thing. The market rewarded investors who stayed on that rollercoaster across the Fed’s policy swings, the fastest and most savage recession in a decade, the omnipresent threat of another one always around the corner, inflation and everything else.

This is proof of the principle that you need to swallow risk if you’re going to reach for reasonable returns. Or in clearer terms, those who are willing to shoulder short-term volatility tend to be the ones who end up with reasonable long-term profits.

Go back four years and Wall Street was twisting itself in knots begging the Fed to cut interest rates to shield us from the trade war. Remember the trade war? It got Jay Powell . . . the same Jay Powell who’s still running the Fed now . . . to take back 0.75 point of overnight tightening.

People were afraid he wasn’t doing it fast enough. The VIX surged to 23 and then 24. At the time, anything above 15 was considered elevated. Looking back at the last year and a half, a score of 23 is now more like “average,” even a little low. Relaxed. Calm.

And then the pandemic blew everything away and suddenly the VIX jumped to 85. That’s what the end of the world feels like. Since then, everything else amounts to an aftershock.

Say you bought the market four years ago when the VIX was spiking and everyone was scared. You would have made 52% end to end, counting the bear markets in between.

That’s about 11% annualized, which is the high end of “average” when you go back to before the Great Depression. It’s what stocks tend to deliver in the long haul.

It’s what you can expect for being in the stock market across the cycle. Some years will pack more risk and lower returns into that experience. Others will provide an easier glide and even outperform.

But that’s what the COVID era has given investors. It’s not bad at all. At this rate, an index fund can triple every decade. If we’re feeling modest, we might say it takes 8-9 years for the market to double.

Either way, it’s a lot better than the bond market. Of course in the bond market there are few headaches. Buy bonds and you’ll get your money back, assuming the federal government doesn’t do the unthinkable and default on its obligations.

You can park in bonds and never turn on the market channels again. You’ll never get angry or scared.

It’s just that you’ll never cheer either. Maybe you’ll earn 3% above inflation at best in the bond market, which is enough to preserve wealth and allow for a little spending over time . . . but not enough to accumulate a fortune in a human lifetime.

Say you buy a 20-year bond that pays 4%, purely for example. In 2043, when it matures, you get your money back. And you’ve booked 4% interest every year, which adds up to an 80% return. (Remember, there’s no compounding here. The yield is the yield.)

You didn’t double your money, but you came close. It took two decades. Where will the stock investor be in that period? It’s your choice.

The COVID era was an extreme stress test. Those who passed earned as much as a theoretical bond investor would need 13 years to match . . . and they did it with nearly a decade to spare.