Considering recent headlines of new all-time highs in the stock market, it’s easy for us to forget that this month we mark the 10 year anniversary of the worst stock market crash since 1929. That event served as a serious reminder to us all that the market can and does go down. Sometimes even violently.
However, last week, while working on a financial presentation for the Young Independence Professionals Group I discovered the most amazing chart. It really put into perspective just how much more powerful the stock market has been in growing wealth than virtually any other investment vehicle that exists today. The premise of the chart was to pretend it was September 2007 and you had 10,000 to invest in any one investment option. The catch was you would have to hold that single investment for the next 10 years straight. Knowing that within the next month the housing market would collapse, taking Wall Street down with it, what investment would you choose?
In the chart, you are then able to track the primary investment options you might have chosen including gold, oil, treasury bonds, real estate, cash, and of course stocks. What was amazing to me was that at the end of the ten years it wasn’t even close. The Dow performed 30% better than any other option, and would have returned 7.8% annualized over that time. The problem was it was a much rougher ride to get there. In fact, at the low point, you would have had to weather a near 50% loss in your balance before seeing any upside. But, in the end, you would have been better off by staying in the market, even if you got in just before it suffered its largest crash since 1929. For me, that statement is remarkable. If you look at market performance over a much longer period, your average annual return is even higher. Over the past 100 years the Dow has averaged a gain of just over 10% per year.
Since, I’m sure for many of you, all the numbers I’m throwing out is giving you a headache, let me get to the point. Of the options listed above, no method of growing your money in the past century has been more efficient, and more productive than investing in the stock market. However, if history is any indication, you will rarely see a slow and steady upward climb of 10% per year in your account. Instead, the investment value might be up 22% one year, down 10% the next two, then up 17% for the next four. This rollercoaster ride is what causes many to lose in the market or not get in at all. Investors must recognize that to get the upside when the market is doing well, they will have to accept that their accounts will suffer short-term losses when the market is down. In the end, the hope is these losses will be more than offset by the investment’s overall long-term performance.
Through market analysis and identifying leading indicators, active management firms like Stewardship Capital, do their best to reduce losses in a down market while also attempting to maximize gains when the market is up, but even then, market fluctuations will cause changes to your account balances. There’s simply no way to avoid it.
As we often say, “past performance is not a guarantee of future results”. But, as someone who studies history, and believes things do tend to repeat themselves, I would strongly encourage you, no matter your age, no matter your income, to have some money invested in the stock market. Historically it’s been a pretty good bet.
(Past performance is no guarantee of future results. Advice is intended to be general in nature.)