Many of us have heard that investing in stocks should be done for the long-term. Historically, those returns have been very attractive, unlike some short-term returns which have been extremely disappointing.
One way to measure past stock market returns is to study the S&P 500 index. It is a measurement of 500 large US stocks since1926.
The average annual return up to 2017 was just over 10 per cent. Three out of every four of the years since 1926 the returns where positive.
Which means one out of every four years the returns were negative.
Before investing in stocks, it is important to understand that they don’t consistently increase in value every year. The stock market is volatile.
It is also important to understand your temperament.
Long-term investing requires patience, discipline, and commitment.
One of the largest mistakes made by investors is to panic during periods of declining returns. Panic often leads to selling investments at a loss and staying out of the market as it recovers.
Will you be an investor who reacts to market volatility by panicking and selling during a normal downturn in stock values?
Sometimes the volatility can be extreme.
Since 1926 the S&P 500 has declined in value by more than 20 per cent in six calendar years. During that same time there were 34 calendar years where the index increased in value by more than 20 per cent.
Those types of extreme fluctuation can be hard on the nerves.
The roller coaster of investing can cause even the most well-intentioned investor to be both greedy and then fearful, transitioning easily between the two based on market volatility.
All investments have an element of risk but long-term investing increases the chances of success.
The conclusion: it’s best to invest for longer periods of time.
Peter Watson is an agent of, and securities products are provided by, Aligned Capital Partners Inc. (ACPI). ACPI is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Peter Watson Investments