…or what you’re told.
As a follow-up to the previous post on retirement accounts, BMB would like to point – again – to John Mauldin’s column from this past weekend. We mentioned it here previously with regards to the beginning of the piece, where John outlined the problems unfolding in Eastern Europe.
But the latter half of the article dealt very well with the real truth about long-term returns in the stock market. As a matter of fact, the second part of the article was published separately at Minyanville, under the title “How to Time the Market (Really)”.
If you’re one of those that it still reciting the ‘buy-and-hope-hold’ mantra, it’s probably worth your time to read it.
Contrary to the studies that show investors they can expect 7% or 9% or 10% by staying in the market for the long run, the stock market isn’t paradise either. Like Texas summers, the stock market often seems like the anteroom to investment hell.
Historically, average investment returns over the very long term (we’re talking 40-50-70 years) have been some of the best available, but the seasons of the stock market tend to cycle with as much variability as Texas weather. The extremes and the inconstancies are far greater than most realize. Let’s examine the range of variability to truly appreciate the strength of the storms.
In the 103 years from 1900 through 2002, the annual change for the Dow Jones Industrial Average reflects a simple average gain of 7.2% per year. During that time, 63% of the years reflect positive returns, and 37% were negative. Only five of the years ended with changes between +5% and +10% — that’s less than 5% of the time. Most of the years were far from average — many were sufficiently dramatic to drive an investor’s pulse into lethal territory!
Almost 70% of the years were “double-digit years,” when the stock market either rose or fell by more than 10%. To move out of “most” territory, the threshold increases to 16% — half of the past 103 years end with the stock market index either up or down more than 16%!
Read those last two paragraphs again. The simple fact is that the stock market rarely gives you an average year. The wild ride makes for those emotional investment experiences which are a primary cause of investment pain.
The stock market can be a very risky place to invest. The returns are highly erratic; the gains and losses are often inconsistent and unpredictable. The emotional responses to stock market volatility mean that most investors do not achieve the average stock market gains, as numerous studies clearly illustrate.
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