I am well aware that investing has been quite a challenge lately. We went through a painful bear market for most of 2022. And after an encouraging 7% rally this past January, the S&P 500 gave back more than half of that gain in February and March.
It is totally understandable to be concerned or frustrated. But please don’t act on those emotions. Even if the current economic headwinds do indeed cause more market volatility and lead to a recession, investing in stocks for your long-term goals remains a smart investment strategy.
Fidelity recently crunched the numbers on how patience can pay off. It tracked a hypothetical $10,000 investment in the S&P 500 stock index made on Jan 1, 1980 through the end of 2022.
If the money was left untouched, the $10,000 invested in 1980 was worth $1.26 million at the end of 2022.
But if an investor had gotten nervous at any point and had moved out of stocks from time to time, and managed to miss just the 5 best days for the S&P 500 during that 42-year investing stretch, the $10,000 would have grown to just $782,000.
You read that right: the difference between the $1.26 million and the $782,000 was simply from missing out on the five best days to be invested in the S&P 500.
If the 10 best days were missed, the $10,000 would have grown to just $563,000. And if the 30 best days—the equivalent of one month of trading days across 264 months—the $10,000 would have grown to $204,000.
Clearly, patience paid off. This example is also a helpful reminder that recessions and bear markets don’t undermine success. Between 1980 and the end of 2022 there were six bear markets (when stocks fall at least 20%) and six recessions. Yet over that entire stretch, $10,000 still managed to grow to more than $1.2 million.
So while I totally understand being jittery about the markets, I sure hope those of you investing for long-term goals will find the strength to practice investing patience. Especially given our current new reality where inflation is a concern.
The rate of inflation continues to come down from its sharp acceleration throughout 2022, but it is not likely to sink all the way to the 2% target that the Federal Reserve considers the sweet spot for economic health. The bottom line is that inflation always was, and always will be a long-term threat to financial security. And over the long term, stocks have proven to be the best way to earn inflation-beating gains.
That’s not to suggest you should only own stocks. Are you nuts? Do you think I am nuts? The point is that having a portion of your investments invested in stocks has always been a smart way to plan for the potential for living costs to keep rising over the years.
The article emphasizes the significance of long-term investing amidst market volatility, specifically referencing the S&P 500's historical performance and the impact of missing the best days in the market. It also discusses the relationship between market fluctuations, recessions, and the necessity of patience in achieving investment success.
Let's break down the concepts mentioned in the article:
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Bear Market (2022): A bear market occurs when the stock market faces a sustained downturn, usually marked by a decline of at least 20% from recent highs. This period often generates pessimism and economic uncertainty.
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S&P 500 Index: It's a stock market index that measures the performance of 500 large companies listed on stock exchanges in the United States. It's widely regarded as a gauge of the overall health of the U.S. stock market.
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Investment Performance: The article illustrates the impact of staying invested versus trying to time the market. It uses Fidelity's study, highlighting the difference in returns between a consistent investment in the S&P 500 and missing out on the best trading days.
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Long-Term Investing: The article stresses the importance of a long-term investment strategy despite short-term market fluctuations. It references the growth of a $10,000 investment made in 1980, which grew substantially despite several bear markets and recessions during that period.
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Inflation: Inflation refers to the rate at which the general level of prices for goods and services is rising, leading to a decrease in purchasing power over time. The article discusses the threat of inflation and how stocks historically outpace inflation, making them a viable hedge against it.
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Federal Reserve & Inflation Target: The Federal Reserve sets an inflation target considered healthy for the economy, typically around 2%. The article indicates that while inflation might decrease from its peak in 2022, it's not expected to reach the ideal 2% target.
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Stocks as Inflation Hedge: Stocks have historically provided returns that outpace inflation over the long term. They are considered a potential safeguard against the erosion of purchasing power caused by inflation.
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Diversification: The article hints at the importance of diversification by suggesting that while stocks are beneficial, it's not advisable to put all investments into stocks. Diversification involves spreading investments across different asset classes to mitigate risk.
Overall, the article advocates for a patient, long-term investment approach, highlights the impact of market timing on returns, discusses inflation's threat, and hints at the benefits of diversification. It's a reminder that despite short-term challenges and market fluctuations, a well-thought-out investment strategy can lead to substantial gains over time.
