We all know that investing typically requires a long-term approach, but when the markets are in turmoil and we’re in the midst of a recession, it’s easy to lose that perspective and focus on what’s happening right now instead. While it can be discouraging and even frightening to see what a bear market can do to your investments, it’s important to look beyond that. It can be reassuring to understand how the stock market has behaved historically.
Myth: Stocks are a poor investment and just too risky.
Fact: The stock market goes through cycles of positive and negative returns. It always has, and it always will. Between 1950 and 2008 there have been about 10 economic contractions which negatively impacted the stock returns. However, after each negative period the market rebounded.
Myth: Increased volatility means you’re better off investing in bonds.
Fact: Volatility diminishes over time. It’s true that short-term returns can vary greatly and investors can see significant gains or losses over the course of a few years, but looking at the long-term returns diminishes the overall volatility. Between 1926 and 2008, the percentage of time that investors lost money in the stock market over any 20-year period was 0%. The percentage of time that investors earned more than 10% annually over any 20-year period was 69%.
Myth: You can increase returns by getting out of stocks when things get bad, and get back in when things start to improve.
Fact: You make money when you buy low and sell high. If you sell off your stocks after the market has already fallen, you’re selling low. Once the market begins to improve again, you’ll then be buying back in relatively high. If everyone could pick the perfect time to get in and out of the market consistently they would be the richest person in the world. Most people can’t accurately choose when to move in and out of the market and actually hurt their returns by trying. Dollar-cost-averaging can help take the guesswork out of investing.
Put it in Perspective
So, make sure you’re looking at the big picture when making investment decisions. Unless you plan on needing the money that’s invested almost immediately, you can keep from making a irrational decision based on some short-term market activity. That doesn’t mean you want to completely ignore what’s going on with your investments, but thinking long-term can help you keep things in perspective and keep your stress levels down.
