Have you ever panicked and sold your stocks or mutual funds? You know what happens; you hear a report about doom and gloom, how the stock market is in free fall and is never going to recover. I talked about this earlier this year when (somewhat surprisingly) the markets declined precipitously only to bounce back quickly. How about when the market lost over one-third of its value in 2008-09 during the housing and financial crisis. Would you have known when to get back into the stock market? Can you time the market?
If this is too gut-wrenching for you, maybe you shouldn’t be an investor in stocks. Warren Buffet once said, “You shouldn’t own common stocks if a 50% decrease in their value in a short period of time would cause you acute distress.” I’m not going to suggest that you own common stocks. I believe most people are better off investing in index funds. Set it, forget it. Continually invest money and eventually you will reap the rewards. Don’t believe me? My friend Morgan Housel has created an excellent chart (below) showing a reasonably exhaustive list of major events which have taken place since 1950 and what has happened to the stock market along the way. Each and every one of these events alone may have sounded like a reasonable reason why you should sell your investments, however as the chart shows, over the long haul — after a relatively short-lived pull back — the market continues its upward climb. There are always events which shake investors’ confidence.
There was those people who felt that a Trump presidency was very bad for the stock market. As it became apparent that Trump was going to upset Ms. Clinton and become our next president, the market averages plummeted. However since that time, the markets overall are up about 3.5%. Several sectors — those which are believed will be strong performers under a Trump presidency — such as energy and banking are up much more: 9.5% and 15%, respectively. Regardless of who is president, Mr. Buffett suggests believes that markets will continue to grow. He feels that stocks will be higher 10, 20 and 30 years from now regardless of who the president is.
A good friend of mine who is an investment advisor suggests that if you are going to buy an individual stock, you should plan to hold it for at least two years before considering whether it is a worthwhile long-term investment. Buffett’s favorite length of time to own a stock: “forever.” (Even Buffett buys and sells stocks; he doesn’t hold stocks forever…) But again, I am not suggesting that you should own individual stocks. Most people lack the skills to determine good investments. Few individual investors, and only one-in-five money managers, beat the market averages. Most of us are better off simply buying index funds and holding them forever.
Don’t try to time the market. Simply invest by making periodic purchases. You are investing for the long run. You should be thinking about your investments in decades, not in days, weeks, months, or even a year or two. Simply keep investing and years from now, you will likely have a very tidy nest egg.
source: Morgan Housel