Since 2009, the stock market returned almost 15% annually. That’s a great return. It’s an even better return considering most people believed it was impossible in 2009…2010…2011…2012…
But that’s how investor perception plays out: either the good times will keep rolling or things will get worse.
Now, the argument can be made that the current bull market hasn’t been running since 2009. If it was 2012, then the market returned about 15% annually. If it was 2016, it’s been about 14% annually.
The sticklers can argue about dates. It’s been a great return…for those who earned it.
Because let’s be honest, over the last nine years, how many people have tried to get out ahead of the impending turn?
And that brings me to the reminder from Peter Lynch (it’s from ’96 but the point is no less relevant):
As long as I’m revisiting an old topic, I can’t resist a chance to repeat some key points in brief, in case somebody out there missed the sermon. Here are some things to think about.
- If timing the market is such a great strategy, why haven’t we seen the names of any market timers at the top of the Forbes list of richest Americans?
- People who exit the stock market to avoid a decline are odds-on favorites to miss the next rally. If you don’t believe corporate profits will continue to rise, and you can’t stomach a decline in the market, don’t buy stocks or equity mutual funds.
- If you were out of stocks in 40 key months over the past 40 years, your annual return on investment dropped from 11.4 percent to 2.7 percent. You underperformed your savings account.
- In this century, we’ve had 53 corrections of 10 percent or more, roughly one every two years. We’ve had 15 corrections of 25 percent or more, roughly one every six years. These setbacks are normal and come with the territory.
- A stock certificate is not a lottery ticket. Behind every stock is a company. Stock prices go up 8 percent a year, on average, because corporate profits go up 8 percent a year. Add in the dividend yield of 2.5 percent (today’s levels) and stocks give you a total return of 10.5 percent. Dividends are raised, on average, by 8 percent a year, right along with corporate profits.
- Even if we go into a long economic slump during which corporate profits grow at only half the normal rate, or 4 percent a year, stock prices should follow suit, rising an annual 4 percent a year. Assuming the 2.5 percent dividend, you would still get a 6.5 percent return, which is better than a 6 percent bond.
- Stocks outperformed bonds in eight out of the nine previous decades in this century, and they are well ahead halfway through this one.
- Since 1965, if you bought stocks once a year and were unlucky enough to pick the worst day to invest (when stocks were at their highest prices) 30 years in a row, you ended up with an annual return of 10.6 percent. If you were incredibly lucky and invested on the best day of the year 30 years in a row, you ended up with an annual return of 11.7 percent. So the difference between perfect timing and horrendous timing is 1.1 percent. This timing business is much ado about very little.
- In a correction or a bear market, great companies, good companies, mediocre companies, and terrible companies all see the prices of their stocks decline. A correction is a wonderful opportunity to buy your favorite companies at a bargain price.
Of course, not everyone thinks there’s an end in sight either. I’m sure some investors believe “about 15% annually” is the new market normal. Well, the message above should help put the likelihood of that 15% into context too.
The 5 Percent Solution – Worth