I’m sure you’ve noticed that majority of investors today are defensively investing, and who can blame them after the big crash of 2008. Presently very few investors have faith in the long term growth of the stock market. Rather than investing with long term in mind, investors have become more aware, yet slightly burned, from the risk that comes with investing in the stock market. Confidence is at an all time low, and when the confidence is low, investors become pretty uncertain as to what to do. Do they sell? Buy more? Definitely a lot of questions arise during uncertain times.
Stock markets are one area that is directly affected by pretty much everything else. The whole debt situation? Yup, totally affects the stock market. Higher inflation? That too. How about the unemployment rate? Totally. How hot the housing market is currently, and will it stay hot? That affects the performance of the stock market as well.
Prior to 2008, most investors believed that if you buy stocks, pick the right ones, re-balance accordingly, and hold on to your stocks long enough, you’ll be able to return a decent profit, and at the very lest get back your initial investment. There is one question that arises from the above: What is exactly long term?
Good question. Long term really doesn’t have a definitive answer to it. You can put three different investors in the same room, pose the question on long term, and get three different answers. Long term is primarily defined through someone’s comfort level, and their ability to ride the stock market roller coaster. Some investors can stomach the roller coaster better, versus other investors.
Despite many different outcomes of the stock market, investing in stocks is still a pretty solid choice. It’s definitely not the preferred way for some to invest, but stocks are definitely a lively option for most. And despite a 2008 market crash, there are many who continue to invest their hard earned money in the stock market, and I believe it’s mostly due to one principle theory:
“What goes down, eventually always goes back up”
The same principle is applied to the stock market. I believe that stock markets always go up over the long term. How long is long term? That’s really hard to define, for some it could be 10 years, and for other is could be 15 or more years.
Consistency within the stock market.
Most investors who don’t invest in the stock market believe that the up and down stock market roller coaster is quite erratic. However, stats show us something different. Stock markets have shown consistency of rising throughout history when the investor stays invested for a long period of time with their long term investment strategy.
So, where does the consistency come from? I think its a two part answer. Part of it comes from the consistent profits of the larger companies. Think Microsoft, Apple, and the big five Canadian banks. Second part of consistency comes from the investors, will they stay the course to fulfill their long term investment strategy? The more investors that jump the ship, the more that the market becomes volatile.
I’m talking here in very simplistic terms. Happenings in the economy and politics, internal and external, hugely affect the stock markets as well, yet the companies and investors have the choice to make adjustments along the way to continue to increase their profits and overcome the turbulence.
Long term vision.
Historical data has shown that the investors who stay in the market for the long haul are the most successful. There are those who believe that they can get rich over night through the stock market, only to cry like kids down the road. Investors that have faith in the stock markets long term tend to do very well.
The nervous investors, rookies and those with short term vision tend to buy and sell at the wrong times. Tough economic times define, and separate the long term from the short term investors. Veterans rise to the occasion, while the rookies fold. I often think of stock investing is like a game of poker, at least they have a lot of similarities.
Just for good measure, check out the 10 year returns of S&P 500:
*Courtesy of Million Dollar Journey
If you look closely, you’ll notice the low peaks of graph. Pay attention to the 10 years before and after each low period, and you’ll notice that there are the high peaks in the 10-year periods prior to and just after the lows. The chart clearly illustrates that stocks bounce back, and what goes down will eventually comes back up.
Most investors don’t have the patience, or dare I say the stomach to ride the stock market roller coaster. And who can blame them, it’s a tough pill to swallow if you’re loosing your hard earned money. For those who stick through the tough times, and do the opposite of everyone else (buy – when everyone else is selling), they are the ones often rewarded in the long run.
News coverage in the last 4 years has been nothing short of brutal. This news has been one fear after another – The world is coming to an end. Systems are collapsing. Over 60% of European nations are in debt. American debt crisis. Housing bubble in Canada. A lot of different news, which has essentially translated into fear for the investors.
When fear is high, most investors shy away, simply because their confidence in the market is low. History repeats it self, and market history shows investors should believe in the idea that markets will always bounce back.
Stock market will continue to bounce back, and you as the investor only have to do one thing – maintain your long term investing strategy and stay the course. History has shown that the successful investors are the ones that stay invested for the long run.
One of my favorite quotes on investing is:
“When everyone is running for the hills by selling, you do the opposite through staying the course and doing the opposite by buying”
In conclusion I’ve gathered a few solid reads on stock markets bouncing back, some of which are much more in depth than my article, yet they support the idea that the markets will always bounce back:
Just in case you missed the first part of this series, here’s part one: 4 Investing Rules – Rule # 1 – Better to be a homeowner versus renting.