Stock Market: Why I Love & Hate It
I knew nothing about the stock market at the age of 12, but I was completely hooked by age 13. My father asked me if I wanted to invest my bar-mitzvah money. I said, “Sure” without really understanding what that meant or how the market worked. My investment grew by $100 the first day and I was elated. My joy was short-lived. My investment fell by a similar amount on day two and I was devastated. This is how my love/hate relationship with stocks started. Thankfully, I am much less emotional about investing these days.
Why Do I Love Stocks?
Stocks are easy to love for a few reasons:
Returns: Stocks have had positive returns in 81% of the rolling 12-month periods since 1946 and have had the best returns of almost any major asset class over long periods of time. For example, the average annualized return, including dividends, for the S&P 500 over the past 10 years (2008-2017) was 8.5%, 20 years was 7.7%, 30 years 10.7%, 50 years 10.14%, and 90 years 9.9%. You can select your own date range and find out the average annualized return HERE.
The returns would be slightly higher if you included stocks of small and medium size companies since the S&P only includes the 500 largest publicly traded US companies, and smaller companies have had higher returns (and more volatility) historically.
Ease: You can literally click a button or make a phone call to buy stocks (once an account is established). Arguably, it may be too easy, causing investors to trade more often than is prudent.
Liquidity: You can sell your stocks any time with minimal transaction fees or penalties compared to other types of investments.
Why Do I Hate Stocks?
It is very easy to forget that the stock market goes in both directions. The market usually performs well just long enough to lull investors into a false sense of security. Many investors feel like Charlie Brown trying to kick the football after Lucy convinces him that this time will be different. We are reminded of gravitational pull on stocks regularly as illustrated by this table from the Capital Group:
Minimize Regret by Never Trying to Time Markets:
Nothing kills your investing enthusiasm like seeing a decline on your monthly statement. Almost all investors have experienced this at one point. It is natural human instinct to go into protection mode by reducing stock market investments following a market decline, or better yet, trying to anticipate a market decline. Unfortunately, millions of investors have found that it is basically impossible to predict what the stock market will do in the short-term. I have written about the folly of trying to time the markets in the past, so I won’t repeat myself here, but if you want to read more, see: Why we never go to cash.
Stock Market Performance During Challenging Times:
The chart below shows that even in challenging times, the market has performed surprisingly well. Even if you knew when we would have recessions, rising interest rates, high unemployment, high inflation or deflation, it still wouldn’t make sense to get out of stocks.
The only reliable predictor of stock market downturns has been recessions, but you would have to act on that information before the recession began. Unfortunately, even the most highly regarded economists are terrible at predicting the timing of recessions.
What Should an Investor Do?
- Have enough cash or safe, short-term liquid investments to provide peace of mind during market downturns and, more importantly, to cover living expenses so you do not need to sell when stock prices are down. The average duration from market peak, through drawdown of 10% or more, back to the previous peak has been 21 months since 1926.
- Do not speculate or try to time markets, but invest based on your time horizon, risk tolerance, investment objectives, and the strategy that gives you the highest probability of success in the long-term.
- Listen to the advice of your financial advisor…especially if that person is me! ????
Have a great week. Questions, thoughts, comments? Email me: firstname.lastname@example.org