There are a lot of misconceptions that can lead people to making poor investment decisions. In this article, I’ll go over 5 truths of the stock market that can help you along your investing journey.
In this post, the stock market is represented by the S&P 500 index. The S&P 500 is a stock index that tracks the share prices of 500 of the largest public companies in the United States.
1. Long Term is Undefeated
The stock market has yet to experience a 20-year period of negative returns. But the day-to-day market movements are largely unpredictable.
Investors should think in terms of probabilities because there are no guarantees when it comes to investing. What this data tells us is the longer you are invested the higher probability you’ll see a positive return.
2. Don’t Expect Average
From 1926-2020, the stock market has had an average return of 10% annually.
While that may be true in the long run, the market rarely has an average return in any given year. These are the market returns by year since 1926:
This shows how difficult it is to predict what next year’s returns will be. If the stock market was consistent each year, there would be no risk. When investing in stocks, expect your yearly returns to vary.
3. Short Term is Risky
On average, there is a 14% drawdown in the stock market every year!
Having an all-stock portfolio with a short-term time horizon is a bad idea. For those investing for the long term, you have to be able to stomach short term volatility in order to be successful.
This chart shows the return and largest decline each year:
4. Always a Reason to Sell
This chart from Michael Batnick is one of my favorites. It shows the different reasons to sell and how the market has performed.
Financial media loves using fear and doubt to gain your attention (See previous post). It’s important to not let short term market outlooks impact your long-term investment decisions.
5. Things Change. Diversify
The five largest stocks from 20 years ago are no longer in the top five.
The S&P 500 index sees lots of turnover. Failing companies get dropped and up and coming companies get added. New and unexpected companies have driven a large portion of the S&P 500 returns the past decade.
The ability for new companies to rise and the current top companies to fall is one of the reasons it’s important to diversify your holdings.
Don’t count of today’s top five companies to stay on top forever.
Investing in the stock market can be an intimidating place. Stocks go up and down; if it were easy everyone would be rich. To make it easier, build a financial plan for your investments that align with your personal goals.
If you have any questions or would like to schedule an appointment, please feel free to reach out to us.
Disclaimers and Sources:
Odds the Stock Market is Positive from George Maroudas (@ChicagoAdvisor): Link Here
Intra Year Drawdown Chart from JP Morgan Guide to the Markets: Link here
S&P 500 average returns 105 since 1926: Link here
“There Are Always Reasons to Sell” by Michael Batnick: Link here
10 Biggest Stocks by Year: Link here
New companies driving returns Link here
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.
Investments in real estate may be subject to a higher degree of marker risk because of concentration in a specific industry, sector, or geographical sector. Other risks can include, but are not limited to, declines in the value of real estate, potential illiquidity, risks related to general and economic conditions, stage of development, and defaults by borrower. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Treasury Inflation-Protected Securities, or TIPS, are subject to market risk and significant interest rate risk as their longer duration makes them more sensitive to price declines associated with higher interest rates.