By Jack Forehand
Market volatility is back and with it comes a significantly elevated potential for rising emotions and the poor decision making that comes with them. For investors, now is as good a time as ever to take a step back and remember what works over the long-term in investing, why it works, and what it takes to get there.
“People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.”
— Peter Lynch, One Up On Wall Street
So in that light, I wanted to take a look at three principles that all of us should keep in mind during periods of volatility and market decline, like what we are experiencing now.
1) Stocks Are the Best Long-Term Investment There Is
There is no asset class that outperforms stocks over the long run. They outperform bonds. They outperform commodities. They outperform cash. And for all the Bitcoin supporters out there, there is no currency nor other store of value that beats stocks. Stocks have trounced gold over the long run. There is nothing you can invest in that has more evidence to support its long-term performance than stocks.
http://www.investorsfriend.com/asset-performance/
Take a look at the chart below of the long-term performance of stocks and try to find the recent decline. You may see the slight blip all the way to the right that represents it, but it is inconsequential relative to the rest of the chart. The same thing will be true whether we get a 10%, 15% or 20% decline here. Even 2008 looks minor relative to the long-term returns.
http://www.macrotrends.net/2324/sp-500-historical-chart-data
But with performance comes risk. The path to long-term out performance in stocks includes sitting through substantial pain. That pain is the price you pay for the long-term results you get. The table below shows the declines during the worst bear markets U.S. stocks have experienced. Despite these declines, stocks have always come back to reward long term investors. If you can’t endure the pain, you will not get the long term results that stocks offer.