Watching the short-term fluctuations of the stock market like those of the past several months can be scarier than riding the steepest of roller coasters. Long-term investors put their money in the market and ride with the returns. Those looking only at the short term relax while the returns ride upward, but often wait in apprehension of a drop. When the inevitable drop occurs, they sometimes panic.
Prudent investors who look at how the market behaves historically know that over the long run, the ups and downs of the market are part of any long-term investing strategy, and that in the end, they are often better off than when they started.
Just as a person's first time on a roller coaster is often the scariest, it is often the first-time investor who is frightened by a market drop.
The value of the market fluctuates, and occasionally the changes can be dramatic.
Price fluctuation is characteristic of all stocks, bonds and mutual funds. During the last 68 years, the stock market has sometimes experienced wide swings in value. For example, the stock market of the 1980s saw one of the longest periods of sustained growth in history. But in October 1987, the market saw one of the greatest single-day declines in history. Generally speaking, the market has continually increased in value with occasional short-term fluctuations up or down.
This historical growth has made stocks one of the best performing long-term investments available. And the longer you keep your investments in the market, the more likely these investments will outperform other assets and offer a better edge against inflation.
Since 1926, the S&P 500 stock index has never declined in value over any 20-year period. However, if you look at each one-year period during this time frame, you will see that 29 percent of the time there was a negative return.
If you held on to that same portfolio for any five-year period, you would have had a negative return only 11 percent of the time. The likelihood of negative returns decreases to three percent if you held those investments for 10 years. As you can see, holding the portfolio for longer periods of time decreases the amount of risk of investing.
By diversifying your investments and investing for the long term, you may significantly reduce the volatility of your portfolio while having the opportunity for better returns.
(Financial Services News was written by Eric Holmes, Vice President
for National Accounts, PEBSCO.)