Staying the course is understandably the most challenging part of the investment process as it relates to your emotions and psychology. To help you overcome your fears, we’re going to explore seven facts about the financial markets that will help you to stick to your plan in thick and thin. Understanding these facts will make you “unshakeable”.
1. The Stock Market Always Rises Over Time
The stock market is very volatile and totally unpredictable in the short term. However, over the long term, it is very predictable and has one direction: up!
That, however, doesn’t mean that all companies’ stocks will go up. Some stocks will do well while some others won’t; but in aggregate, the market always goes up over the long term. This has always been true in the last 120 years or so of market history: despite several setbacks, including two World Wars, endless political conflicts, epidemics, pandemics, numerous recessions, depressions, and financial crises, the market has always recovered and continued relentlessly its upward climb.
2. Nobody Can Accurately Predict Market Movements In The Short Term
The financial industry sells the delusion that, if you are “smart enough” and if you follow the economy and financial news, you could gain a competitive edge in the market. Nothing could be further from the truth! Unless if you are wise to this trap, it is easy to fall for it.
Analysts from big-name investment banks or financial media professionals continuously make predictions about the market direction (until they are eventually right). Some of these “experts” actually believe their own predictions, some others are just salesmen. Are they clueless or liars? You decide…
3. On Average, Corrections Have Happened Once A Year
A correction is a drop between 10% and 20% in the stock market from its recent high. Ever since 1900, a correction has happened on average once a year. Moreover, historically, the average drop was around 13.5% and has lasted around 54 days (again, on average) before a recovery followed.
Therefore, it is important to accept these corrections as regular occurrences in your investing lifetime and not to freak out when they happen. It might feel uncomfortable when your assets are impacted by a correction. This is why many investors panic and sell at the worst time. On the other hand, if you hold tight, the correction would pass before you even realize it.
4. On Average, Only 1 in 5 Corrections Turn Into a Bear Market
A bear market is when the market drops 20% or more of its recent high. Historically, one in five corrections (on average) turned into a bear market. In other terms, in 80% of the cases, if you panic and sell during a correction, you might as well be doing so before the market rebounds and recovers; therefore, you would have turned a “paper loss” into a real loss. Once you understand these odds, it will be much easier to remain calm and stay the course.
5. On Average, Bear Markets Have Happened Every 3 To 5 Years
There were 35 bear markets in total between 1900 and 2020. Therefore, they happened on average, every 3.5 years. Over the last 75 years ending in 2020, there were 15 bear markets, which averages at around one bear market every 5 years or so. Note that these are just averages, so that does not necessarily mean that bear markets were spaced out this way, nor that there is a recurring predictable pattern for them.
Historically, the average drop during a bear market was 33% and in a couple of cases, the drop exceeded 50%! Moreover, over the last 75 years, bear markets varied greatly in duration: from a couple of months to nearly a couple of years, with the average recovery duration being around one year.
What does that mean to you as an investor? If you are investing for the long term, you shouldn’t be afraid of those bear markets. Just stay the course and continue investing regularly as per your plan during the market downturn as investing during those recurring bear markets could help in catapulting you forward towards your financial goals.
6. Bear Markets Always Turn Into Bull Markets
Every single bear market in history has been followed by a bull market. There was no exception! That means if you are the type that would panic and sell during a bear market, you might as well miss the bull market and the outstanding recovery that shall follow.
Oh, and don’t be tempted to move out of the market to reinvest back once the turmoil is over. It simply doesn’t work!
7. Staying Invested Is The Wisest Thing To Do
I believe we’ve explained by now that market timing doesn’t work and that no one can predict market movements in the short term. Yet, when the market reaches an all-time high, some investors tend to get that “fear of heights” and stop investing, or worse, they pull their money and wait in cash.
Being out of the market and waiting on the sidelines even for a short period can be very costly. A study conducted by Fidelity (see the figure above) shows that if you have stayed invested between 1980 and 2018, you would have made the market returns (first column). If, however, you have pulled your money out and missed 5 of the best trading days over that same period, your returns would have been reduced by 35% (second column). If you have missed the 50 best trading days (fifth column), your returns would have been reduced by a whopping 91%! Moreover, the best trading days tend to be within just a week or two from the worst trading days. How on earth do you expect to time this correctly? This is why staying invested all the time (in good times and bad) is the wisest thing to do.
If you would like to learn more about these seven “freedom facts”, read Tony Robbins’ book: “Unshakable: Your Financial Freedom Playbook”.
