Do You Know The Price Of Admission To Earn High Returns In The Stock Market?

To answer the question posed in the title of this article, volatility is the price you pay to earn high returns in the market.

History bears this out.

Over the 100-year period stretching from 1915 to 2015, a dollar invested in the S&P 500 (a US stock market index) turned into $14,300 after accounting for dividends. That’s a mind-boggling return of over one million percent.

But do you know how rough that period had been for investors? Here’s former Motley Fool writer Morgan Housel explaining:

“1. 90 times stocks fell at least 10% — once every 11 months, on average.

2. 21 times stocks fell at least 20% — once every four years, on average.

3. 9 times stocks fell at least 30% — once every decade, on average.

4. 3 times stocks fell at least 50% — a handful of times in your lifetime, if you’re lucky.”

Individual stocks can take you on an even wilder ride. The energy drinks company Monster Beverage was the best-performing US stock in the 20 years ended 2015. In that period, it gained over 105,000%, which equates to a compound annual return of an incredible 41.6%.

Here’s Morgan again with a chart that “shows when, and by how much, Monster stock was below its high of the previous two years. (Periods at 0% show when shares hit a new two-year high).”


Notice how often Monster Beverage clocked up declines of 30% or more (look at the portion of the chart that’s below the ‘-30%’ mark) from a previous two-year high in a 20-year stretch that saw it become literally the champion of the US stock market in terms of returns.

The phenomena you’ve seen above is found in Singapore’s stock market too. The quartet of Raffles Medical Group Ltd (SGX: BSL), Vicom Limited (SGX: V01), Straco Corporation Ltd (SGX: S85), and Riverstone Holdings Limited (SGX: AP4) were solid winners for the nine-plus years stretching from 1 January 2007 to 5 February 2016.

Raffles Med, Vicom, Straco, and Riverstone price change from 2007 to 2016
Source: S&P Global Market Intelligence

Now, here’s a chart that shows the largest peak-to-trough loss that each of them suffered in every calendar year from 2007 to 2015:

Annual maximum peak-to-trough loss for Raffles Medical, Vicom, Straco and Riverstone
Source: S&P Global Market Intelligence

In 2010, Raffles Medical, Straco, and Riverstone suffered a peak-to-trough decline of over 10% each. The same thing happened in 2011. In 2014 and 2015, Vicom saw peak-to-trough falls of around 15% in each year. And, let’s not forget the stunning peak-to-trough collapse of around 60% seen with Raffles Medical and Straco in 2008.

Seeing our stocks fall over the short-term can be an emotionally draining affair. I know – I’ve been through it. But, I think simply knowing how common volatility in the stock market is – even with huge winners – can help us react to it in a better way.

By presenting all the data above, I hope I can reach more people with the important message that volatility is something normal that every investor has to deal with while on the path to earning superior long-term returns.

For those of you who'd like more investing insights and important updates about Singapore's stock market, you can sign up for The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore, right here.

Also, like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Raffles Medical Group and Riverstone Holdings. Motley Fool Singapore writer Chong Ser Jing owns shares in Raffles Medical Group, Vicom, and Straco.