By Myra O’Dell
The stock market tends to move in cycles with periods of both expansions and contractions. If you have been watching the news or your portfolio over the last few days, you are aware that we have recently entered what appears to be a period of contraction or correction. Each downturn in the market, while in the midst of it, feels like the worst one ever. However, historical data suggests that holding on through the difficult times can pay off in the long run. As you can see in the graph below, each contraction, when viewed in isolation, appears much worse than looking at the big picture.
The good news is that, while some periods of decline have been severe over the years, the market overall has grown over time. Dating back to 1970, large cap stocks have an annual average compounded return of 10.4%. That tells us that you are likely to be rewarded for staying the course with your investment plan. Investors who attempt to time the market run the risk of missing exceptional returns. For example, the last bear market that we experienced began in 2007. The chart below illustrates the value of a $100,000 investment in large cap stocks during the period 2007–2014. The value of the investment dropped to $54,381 by February 2009. If an investor remained invested over the next 70 months, the ending value of the investment would be $172,425. If the same investor exited the market at the bottom to invest in cash for a year and then reinvest in the market, the ending value of the investment would be $112,340. An all-cash investment at the bottom of the market would have yielded only $54,569.
We encourage you to stick with your investments even through times of market turmoil knowing that these types of cycles are normal. While I can’t see the future, I am certain that if you are invested in the stock market, there will be times that your portfolio will be down. However, I also think that you will be rewarded over the long run for sticking with it.