Did I read that right? When Stock markets go down investors should be happy. Tony you must be going crazy. Why would I be happy if my investments go down? I panicked during the 2008-9 crash. The experts said this was the end of the capital markets. Stocks are too volatile. I cannot afford to take any losses in my portfolio. I worked too hard to earn it. What about real estate or gold or commodities or cash or annuities………???
These are all good questions, statements and concerns. However you cannot
earn the superior return of the stock markets without taking on risk. As I mentioned in past messages the Standard & Poors 500 earned 9.75% from 1926 to 2012. I also mentioned that there were 22,040 trading days during this time and only 52% or 11,461 days were up days. This means that there were 10,579 down days.
In order to earn this return you needed to stay in the market. Just a few of the crisis periods include the 1929 stock market crash and subsequent depression in the U.S., World War 2, the Cold War, The Korean War, the Vietnam War, the Cuban missile crisis, the 1987 crash, the Gulf War, the technology bubble and the housing bubble. This of course does not cover all the events which shook the markets around the globe but represents a good sample.
The reason we earn a superior return within the stock markets is we assume some risk that the markets reward us for. In other words if there were no down markets there would be no ‘good’ returns realized.
Please keep in mind that I mention the S&P500 only for illustration purposes. I am not suggesting that you buy the S&P500 and just wait out the down turns.
Diversification is vital to your investing success. This requires an in depth knowledge of the dimensions of returns.
Recently I was told that real estate offers better return with less risk. The real reason many believe this is because they cannot look up the value of their real estate every day. In fact, they cannot look up the value of their real estate minute by minute on their cell phones like stocks. A hypothetical question might be how much could you have sold your real estate, any real estate during the market low March 2009? One can only guess however I recall one example of a 60% discount from the 2007 high. Of course, you would not sell at that time, unless you absolutely had to. You would hold on until the prices recovered. Why then would you sell your stocks at their low? Why not wait until prices recovered which they did.
Like real estate there are examples of picking the right stocks for high returns. Unfortunately like real estate there is no correlation between past successes in stock picking and future results. This is exactly what the Wall Street bullies are hoping for. The bullies are hoping you will continue to gamble and speculate with your money. You are gambling and speculating if you are:
- Stock picking
- Market timing
- Track record investing
Everything that I have discussed requires investors, whether real estate or stocks, to control their emotions. Not only during down markets but also when certain market sectors are charging ahead.
For most if not all it will requires the guidance of an investor coach.
Your investor coach will help you develop a prudent portfolio, provide the necessary knowledge and keep you focused on the long term.
Part of that knowledge is the following three simple rules
- Own equities and fixed income
- Globally diversify
- Rebalance
So the next time the stock market crashes, be happy. Because you know in the long term this will result in superior returns you need to realize your financial goals.
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