People worry about stock market crashes wiping them out.
And it’s no wonder, given how the press report stock market fluctuations.
The headline below, from 22-23 September 2011 describes a week when, for example, the FTSE 100 index of leading UK company shares finished the week at 5,053.71, up +0.24% on the day but down -5.86% over the week.
A 5% drop in your investment value isn’t nice, but it’s not permanent, nor unexpected.
Over the past 120 years, the stock market has trended ever upwards.
But throughout a given year, significant drops are standard.
The Standard & Poor's 500 Index of 500 leading publicly traded companies in the U.S. has achieved an average annualized return since 1957 of 10.67%.
The same stock market has experienced an average intra-year drop of 13.8% and a median drop of 10.5%. Nearly treble the drop that lead to the bloodbath headline.
The stock market tumble headline would have been more accurate if it had read “Typical Intra Year Decline Won’t Last”
But that’s not how you sell papers!
Yet the fact is stock markets have ‘intra year’ declines, only to rise back up. Here’s all the proof you need:
But if you invest in the right way, you have nothing to fear.
Because these drops are the very volatility that will also drive your savings to grow by 10% or more a year on average.
If you invest in the right shares or funds you are investing in the great companies of the world; the holders of patents and brands, the makers of everyday essentials and the competitors that drive the world economies.
These companies will continue to compete for market share, continue to grow and to innovate and that will create the long term growth pensioners, savers and investors seek. Why? Because that’s why they exist and if they don’t, a competitor will.
Along the way, sadly, there will be ups and downs as traders in the city bet on different outcomes, wars and pandemics and strikes and natural disasters hit.
These will create the intra year declines and the scary headlines.
You can invest in these companies and benefit from their long term success provided you can live with the temporary declines.
And anyway, those declines can be made much less painful with a well diversified portfolio that also includes quality bonds.
You just need to decide whether to invest directly in shares, in active funds, or passive funds.
