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Whether you're a seasoned investor or just beginning your financial journey, you’ve probably heard that long-term investing is the most reliable path to wealth accumulation and financial stability.
But with volatile market conditions and unpredictable trends, it can feel like riding a rollercoaster. During periods of uncertainty and fear, it's crucial to anchor yourself with fundamental principles that will guide your investing decisions. Here are 5 historical investing facts that will help settle your nerves and set you on the path towards investing success:
Corrections and Bear Markets Are Normal
On average, corrections (10% loss from the peak) have occurred about once per year since 1900. The average correction has lasted 54 days. Less than 20% of all corrections turn into bear markets (20% loss from the peak). Bear markets are normal, and happen every 3-5 years. They have always been followed by a bull market. Long-term, the U.S. stock market has ALWAYS increased throughout history. It may not be a smooth ride, but the market always recovers. Always. And, if someday it doesn’t, no investment will be safe and none of this financial stuff will matter anyway.
Market Timing Is Not Smart for the Average Investor
First of all, market timing is NOT recommended. There is not a single prominent investment manager (Ex: Warren Buffett, John Bogle, Ray Dalio, Peter Lynch, Michael Kitces) that believes market-timing is a good strategy. The reason is, not only do you need to know when to get out, you need to know when to get back in. Achieving higher returns through market-timing is purely attributed to luck. It is not an effective strategy.
"If it were truly possible to predict corrections, you'd think somebody would have made billions by doing it." –Peter Lynch, legendary mutual fund manager
If you’re still insistent on timing the market, consider this: investing with a long-term time horizon eliminates the bulk of risk associated with buying at the wrong time. Here is an extreme hypothetical to illustrate:
- Mr. Perfect-timing: In 1993, Mr.P invested $2,000 annually for 20 years when the markets hit an annual low. His balance in 2013 was $87,004
- Mr. Worst-timing: In 1993, Mr.W invested $2,000 annually for 20 years when the markets hit an annual peak. His balance in 2013 was $72,487
The moral of the story is that even with spectacularly bad luck, Mr. Worst-timing still made a substantial profit, thanks to compounding + long-term time horizon.
The greatest danger is being out of the market.
From 1996 to 2015, S&P 500 returned an average of 8.2% a year. But, if you had missed the top 10 trading days during those 20 years, your returns dwindled to 4.5% per year. JP Morgan found that over the last 20 years, 6 out of 10 of the best trading days in the market occurred within two weeks of the 10 worst trading days.
Today’s winners are almost always tomorrow’s losers.
A study done in 1999 looked at the performance of all the top-performing funds 10 years AFTER they received a five-star rating from Morningstar. Of the 248 stock mutual funds with a five-star rating, only 4 kept that rank after 10 years.
