If you’re reading this, it is probably because you’ve been told that investing in stocks will make you money. Or perhaps you’ve been told that you should invest in mutual funds to save for retirement or a child’s education. Both of these statements can be true and represent sound advice, but you also need to know what to expect when you decide to invest.
First let’s start with some statistics about the returns of equities (stocks). The S&P 500 is an index of 500 stocks representing many of the largest companies in the United States and is a good benchmark to use for this discussion. Through 2015 year end, the trailing five-year return of the S&P 500 with dividends reinvested is 12.57%. The trailing 10-year return is 7.31%. The trailing 15-year return is 5% and the trailing 20-year return is 6.44%. (For more, see: The S&P 500: The Index You Need to Know.)
These are numbers that you may be familiar with. I’ve heard many people reiterate that the long-term return of stocks is around 8-10%. But what many don’t know is what you have to be prepared for during those intervals of 10, 15 and 20+ years in order to participate in positive stock market returns.
Since 1980, the average intra-year decline of the S&P 500 is 15%. Yes, you read that correctly. As an equity investor, you should be prepared for your equity investments to temporarily decline in value by 15% each and every year. Additionally, every five to six years, the S&P 500 finds a way to temporarily decline in value by 30-50%.
Stay the Course
These are the events that absolutely doom the average investor. It can be very stressful to weather these temporary declines if you don’t know to expect them. But, as you can see by the return numbers during the same time periods, those who stay the course are well rewarded for doing so. The declines can never be timed. Do not listen to anyone that tells you otherwise. You could be guessing yourself out of a fortune. (For more, see: Market Timing Fails As a Money Maker.)
Over the 20 years from 1996-2015, an investor that stayed fully invested in an S&P 500 index with zero changes to their portfolio would have enjoyed a 6.44% annualized return. To put that in investment terms, a $100,000 investment would have grown to $348,347 over this 20-year span. By missing just the 10 best performing days of the S&P 500 during this same time period would have diminished your annualized return to 2.81% annually and left you with $173,979 in that same initial $100,000 investment. This is the powerful effect that poor market timing can have on your nest egg.
The two main takeaways I’d like investors to gain from this article are as follows:
- Successful investing doesn’t always come easy but if you brace yourself to expect the inevitable down years and volatility, you arm yourself with the knowledge to be prepared and ultimately successful.
- Market timing in an attempt to save yourself from temporary declines in your portfolio cannot be done with any consistent degree of accuracy and can be very dangerous to your overall wealth and financial plans.
Proceed with optimism. In my opinion, the path to investing success is simple but certainly not easy. (For more, see: How to Avoid Common Investing Problems.)
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