In my previous post, I mentioned that in the end, you will make money through a buy-and-hold strategy. There will be volatility, the worst of which will be short-term. Over the long run, the stock market is an excellent place to build wealth. But you have to stay invested, even when everyone is telling you the sky is falling.
Here is a quick quiz for you: we all know the past four years have been hard on the economy. The housing bubble burst and the value of homes tanked. The stock market dropped in 2008 by over 35%! People lost their jobs. Every day the news reports seemed to paint a picture that was bleaker than the previous day. But, from 2008 through 2011, which is four years, how many of those years did the stock market have a negative return? I’ll give you a second to think it over.
Many people would most likely answer three years. At least that is the answer most people responded with when I asked them personally. The actual number of years the stock market was down in the past four: once in 2008. Below are the returns for each year:
Based on the gut-wrenching stories the news reports on, you would think that the market was down every year in the past four years. But it has not. Even as depressing as the news has been, the market has been positive every year since 2008. The point is that the market always comes back. It has never dropped to zero. If it does, we have a lot more than money to worry about.
Take a look at the chart below. It shows the annual return of the total U.S. stock market each year from 1926 through 2011.
Looking at it we see two things:
- The chart is a bell curve, meaning that for the most part, there is a general percentage return that the market earns in a given year. Years like 2008 (black box, far left) are an anomaly.
- The second thing to realize is the market gains (has a positive return) 76% of the time. That’s three out of every four years. Coincidentally, in the past four years, the market is up three of the four years.
The point I am trying to make is that there is short-term volatility in the market. There will be large swings higher and lower. In the end, the stock market will rise higher. But that is in the long term. In the meantime, you will need to learn to become comfortable with the daily swings, knowing that in the long run, the market will be higher.