Investing can seem overwhelming, with a barrage of complex financial jargon and conflicting advice from so-called experts. However, at its core, investing is about making informed decisions. Here are four basic reminders that shape my long-term investment philosophy.
Always a Reason to Sell
The first thing to know about stocks is there will always be a reason to sell.
What if interest rates keep rising? What if the housing market crashes? What about inflation? What about the election? What about the war? What if the world ends?
The list could go on forever. And let’s be real, if the world were to come to an end, your portfolio balance wouldn’t matter.
It’s important to remember that even in the most favorable market conditions, there will always be something to worry about. Here are some the negative headlines we’ve seen in recent history:
Volatility is an Opportunity
Although we wish we could avoid declines at all costs, declines are an inevitable part of investing in the stock market.
Avoiding volatility may sound good in theory, but volatility is the price admission for superior long-term returns.
In hindsight, every previous decline in the market was a buying opportunity. However, every time you are living through a market decline, it feels like it will never end.
Your investment performance will mainly be derived on how you handle these difficult periods.
Stocks Normally Go Up
Last year was a reminder that in any year anything can happen. What I like to focus on is what happens most of the time, not just a small sample size.
For the past 100 years, the US stock market has gone up in roughly 3 out of 4 years on average. With an average return of +9.6% per year.
The longer you invest, the higher probability of positive returns.
This makes sense because corporations like making profits. There are more people who want things better, not worse. This demands incentives for entrepreneurs and businesses to develop better goods and services.
And the winners in this process get bigger as revenue grows. As revenue grows so do earnings, And earnings ultimately drive stock prices higher.
Investing is Necessary
There is no single investment that guarantees success or the desired results you want. However, not investing guarantees poor results.
If you keep your money in the bank or under your pillow, you’ll crush any chance of increasing your wealth overtime.
For many people, pursuing their financial goals requires them to put their money to work.
No one has control over market events but we do have control over our savings rate, how we allocate our assets, and how we make informed investment choices.
By focusing on what you can control, you can take the necessary steps to reach your goals, even if the market presents challenges.
Reasons to sell chart from @ChicagoAdvisor. Market represented by S&P 500 index total return from 3/9/2009 to 8/4/22. Data from YCharts
US stock returns following declines from @ChicagoAdvisor. Data from YCharts
Probability of positive returns from @ChicagoAdvisor and data from Bloomberg.
Growth of $100 from @ChicagoAdvisor. Data from stern.nyu.edu.
Stock investing includes risks, including fluctuating prices and loss or principal. This information is not intended to provide specific advice or recommendations about any stock nor is it intended to be a recommendation to buy, sell or hold any stock investment. We suggest speaking with your financial professional about your situation prior to investing.
Please consult your financial advisor regarding your specific situation. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy ensures success or protects against loss. This information is not intended to be a substitute for specific individualized tax advice. The Standard & Poor’s Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.