You’re Flat-Lining Right Now…And That’s a Good Thing

I was walking through a long-term growth chart with a client the other day in an effort to show that even major market turmoil shows up as blips when you take the long-run view. You’re probably all familiar with charts like these. Here’s one that shows a global portfolio over the last 45 years starting in 1970:

Logarithmic Chart of Global Portfolio 1970-Present

Logarithmic Chart of Global Portfolio 1970-Present

Obviously there are a lot of bumps along the way, but they don’t stop the long upward march of the market. However, I’m starting to think that this style of presentation may be doing a disservice to the long-term investor. Long-term returns are often presented in a logarithmic chart as you saw above—you can see the scale on the graph above isn’t linear. The reason to do this is to smooth out exponential growth such that early volatility doesn’t get drowned out by the massive scale of recent volatility. It gives investors a better idea of how often the market hits volatile patches. In other words, if I’m dealing with numbers in the thousands in the most recent years of my chart then an early drop of nearly 50% on lesser numbers is hardly going to register if we don’t look at things exponentially. You can see that below where I’ve put together the exact same chart presented with a linear scale:

Linear Chart of Global Portfolio 1970-Present

Linear Chart of Global Portfolio 1970-Present

When looked at this way, there’s no sense of the volatility that occurred in the early years since it essentially shows up as a slowly rising flat line for the first twenty years. So although a logarithmic chart makes sense for most applications there is a powerful lesson in our simple linear chart that could get lost: for the long-term saver, current volatility is nearly irrelevant. When we look back thirty years from now on today’s market volatility, it’s ultimately going to look like a flat line on our overall path. To show you, let me magnify two sections on our linear chart:

Linear Chart of Global Portfolio 1970-Present

Linear Chart of Global Portfolio 1970-Present

Here’s the first section from roughly 1970-1975:

Global Portfolio 1970-1975

Global Portfolio 1970-1975

That’s tremendous volatility. The market rose nearly 60% over the first several years followed by a crash that erased all of those gains. There’s no doubt that a thirty year old starting to save in 1970 was getting run through the entire gamut of investor emotions, but in retrospect we just see a flat line.

Here’s the second boxed time period which is a bit more recent between 1998-2002:

Global Portfolio 1998-2002

Global Portfolio 1998-2002

Another relatively ugly, volatile time for any investor. Nevertheless, it still doesn’t have near the same impact on total wealth because it’s more than 15 years in the past. As a comparison to the two above charts, here’s the same global portfolio for the last couple of years:

Global Portfolio 2014-Present

Global Portfolio 2014-Present

Recent market performance doesn’t look that dissimilar from those other highlighted periods. The point is that when you are in the early portion of your financial path the market’s random walk is irrelevant to you. You’re in the flat line portion of your own long-term chart where the amount you are saving is far more important than any temporary gains or losses in value.