This post was originally published on TKer.co on October 15, 2021.
The stock market can be an intimidating place: it’s real money on the line, there’s an overwhelming amount of information to follow, and people have lost fortunes in it very quickly.
But it’s also a place where thoughtful investors have long accumulated a lot of wealth.
The primary difference between positive and negative outcomes is related to misconceptions about the stock market that can lead people to make poor investment decisions.
With that in mind, I present to you ten truths about the stock market.¹
There’s nothing the stock market hasn’t overcome.
“Over the long term, the stock market news will be good,” billionaire investor Warren Buffett, the greatest investor in history, wrote in an op-ed for The New York Times during the depths of the global financial crisis. “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
Since that op-ed was published, the market emerged from the global financial crisis. It also overcame a U.S. credit rating downgrade and a global pandemic among many other challenges. The Dow closed Thursday at 34,912, just 2% from its all-time high.
Btw, historically you didn’t have to wait a hundred years for positive returns. Since 1926, there’s never been a 20-year period where the stock market didn’t generate a positive return.
While stocks usually go up over much shorter periods, the odds of positive returns improve as you lengthen your time horizon.
For more, read: In the stock market, time pays ⏳ and A very long-term chart of U.S. stock prices usually going up 📈
Bull markets come with lots of bumps in the road.
While the S&P 500 has usually generated positive annual returns, it’s also seen an average drawdown (i.e. a decline from its high) of 14% during those years.
The chart below from JP Morgan Asset Management does a nice job illustrating this. The grey bars represent each calendar year’s return and the red dots represent the intra-year drawdowns.
Bear markets are no picnic either: They can happen quickly, like the S&P500’s 34% drop from February 19, 2020 to March 23, 2020; and they can happen painfully slowly, like the 57% decline from October 9, 2007 to March 9, 2009.
Investing for long-term returns means being able to stomach a lot of intermediate volatility.
Read More: 10 truths about the stock market
