Stock Market Gains Over Time
Monday, July 6, 2009 at 7:07PM
A recent Barclays Capital survey of those with an excess of $820k in investable capital found that most are still concerned about the risk offered by the stock market. Talk of risk and volatility has even more “ordinary” folks (those whose investment portfolios are mostly in the form of retirement accounts) scared to brave the “risks” of the stock market. This idea of the stock market as “risky” is a valid concern for the short term – and even for the long term if you want spectacular returns. However, it really doesn’t address the basic fact that, over time, the stock market pretty much always gains.
Taking a Long-Term Perspective: Short-term, the stock market is volatile. It is difficult to predict what the market will do collectively, much less get a solid read on individual stocks. Investing in individual stocks in the near term is asking for heartburn. Especially in the kind of market we’ve been seeing for the last eight months or so. But that doesn’t mean you should write off stocks altogether. Stock market down cycles represent natural occurrences in overall economic cycles. And every so often we have a rather dramatic crash (or near-crash). But, in the end, the stock market has always historically overcome crashes to become profitable.
Volatility, Time and Returns: When thinking long term, realize that it isn’t good enough to consider 10 years as sufficient when discussing the stock market. To see predictable gains over the long haul, you have to be willing to extend your time frame out to 25 years. And in any given 25-year period since the dawn of stock trading, the stock market has never come up negative. Of course, the down side is this: As volatility over time goes down, so, too, do returns. This handy graphic from The Oblivious Investor illustrates the best and worst stock market returns, after inflation, over periods of various lengths:
Stocks Gain Over Time: As you can see, it is possible to enjoy amazing gains in the short term. However, the potential for large losses is also present. Long term, though, the story changes. The chance of loss is always present, but, historically speaking, the stock market does not lose in the long run. While the success of individual stocks may be another story, the bottom line is that the stock market as a whole always comes out ahead if you give it enough time.



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