You’ve probably heard that it’s a good idea to invest for the long term but why is that the case? Below we’ll look into the history of the stock market and what you should know before investing.
There Are Always Reasons to Sell
The first thing to know about stocks is there will always be a reason to sell. If you look at any point throughout history, there was always something to worry about.
However, there’s nothing the stock market hasn’t overcome. The chart below shows the market’s overall growth (+702%) through major crises and events in recent history.
The Importance of Time Horizon
Your time horizon is one of the important components of deciding when to buy or sell stocks. The longer your holding period, the better chance you have at seeing positive returns. Your ability to think long term is one of the few advantages you can have as an investor.
Average Stock Market Return
Historically, the longer you are invested the better your returns are. In fact, the U.S. stock market has never been down over a 20-year period. The chart below shows the best, worst, and average annual returns based on the holding period.
Overall, the average stock market return is roughly 10% annually. While that may be true in the long run, it’s rare the stock market return is near the average in any given year.
Since 1926, the stock market return has been between 8% and 12% only four times. As you can see in the chart below, there is no consistency for year-to-year returns in the US stock market.
How Often Do Stocks Decline?
Investing for the long-term means being able to stomach volatility in the short term. Although we wish we could avoid declines at all costs, declines are an inevitable part of investing in the stock market.
How often do these declines happen on average? Here’s the history of market corrections from 1926-2022.
History of Bear Markets
The technical definition of a bear market is when the stock market declines by 20% or more from its high.
In hindsight, every previous bear 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 bear markets.
Each bear market is different but looking back at history can give us some perspective.
The stock market is going to go down sometimes. If you are not ready for that, you shouldn’t own stocks.
Volatility is the cost of admission for market returns. You can do very well over a long period of time in investing, but you have to be ready for the volatility along the way.
Sources and Disclaimers:
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
Probability of positive returns from ChicagoAdvisor and data from Bloomberg
Stock market average annual returns from ChicagoAdvisor and data from Dimensional Funds
Historical return scatter plot from ChicagoAdvisor and data from Stern.NYU.edu
Bear Markets since 1950 from ChicagoAdvisor data from YCharts
History of market corrections from ChicagoAdvisor and data from Bloomberg
Stock market represented by S&P 500 index.
Rounded up for bear markets. Decline of -19.4% in 2011 and -19.8% in 2018 were counted as a bear market for the purpose of this post. Technical definition is a decline of 20% or more.
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.