Over the last 50 years the average retail investor has yielded 1% in the US stock market while the overall S&P500 has returned 10% annually. Honestly, the reason is that the retail investor is driven in their behavior by their emotions. They typically wait too late to invest and when the market corrects downward, they sell. The retail investor actually buys high and sell low. This is not a good investment strategy.
The 100-year history of the stock market will show that buying and holding great companies, like those in the S&P500, who make and increase their earnings in most years, is a great way to invest. If you look at the chart above you will see that the average Bull market, defined as an increase in the cumulative prices of stocks by 20% or more, last for more than 70 months and averages a cumulative return a 268%. The average Bear market, defined as a decrease in the cumulative stock prices of 20% or more, last on the average 14 months and returns a decrease of 33% on average. As I mentioned above the average return on stocks in the United State over the last 100 years has been 10%. The stock market has been the greatest wealth creation vehicle fo several generations of Americans. It creates wealth for those who know how to navigate the short-term volatility inherent in the trading platforms responsible for pricing, selling and buying common stocks daily.
Most downturns in the stock market recover within 5 years. There have been a couple of exceptions like in the 1929 crash it took 8 years, the 1974 crash took 8 years and of course in the 2000 we had the lost decade that took 8-10 years for a full recovery. There has never been a 15 year period, even from 1929-1944, when the stock market did not make money net of inflation. I tell my clients that if your investment horizon is less than 10-15 years, the stock market is not an appropriate investment for you. This is a conservative approach, which is my approach in the way I advise my clients. Another tenant of investing that I employ is to never sell in a down market. This means that if you are living off your investment portfolio, you need to have 5-8 years of liquid investments, not invested in stocks/risk assets, available to pay bills until the market corrects back. These strategies assure that you will never sell while stock prices are low. It’s easy, say it with me: “buy low, sell high”.