Simple Certainty | Hold Fast: Why Being Out of the Market is the Biggest Danger of All

Of all the dangers posed by the stock market, the biggest is being out of it.

Hi, Brendan Murray here, back with the final episode in our Simple Certainty series on markets. If there’s only one thing you take out of this series, then let it be that opening statement. Type it out in big, bold letters and tape it to the wall; it’s a guiding light in the world of investing, and I’ll show you why in this blog.

If you missed either of the pervious episodes in this series, which focused on corrections and bear markets, make sure you check them out. They cover some key facts which provide background to what we’re going to chat about now.  

This episode will focus on three facts that clearly demonstrate the danger of being out of the market.

Fact 1: Forget the crystal ball

No one – and I mean no one – can predict what the market is going to do. The media perpetuates the myth that, if you’re smart enough, you can determine when the market will rise and when it will fall, and jump in and out at the right moments.

Bulldust. It’s crystal-ball nonsense. And you don’t have to take my word for it. Listen to two of the most successful masters of the financial world, Jack Bogle and Warren Buffett. Bogle, whose company Vanguard manages more than $3 trillion in assets, has never met nor heard of anyone with the ability to time the market. And Buffett, in true Buffet style, dismissed the myth sharply when he said: ‘the only value of stock forecasters is to make fortune tellers look good’.

Fact 2: The long-term trend is UP

The stock market rises over time. If you want the best indication of what’s going to happen in the future, forget the crystal ball; look to the past.             

From 1980 to the end of 2015, the average intra-year decline was 14.2% in the US stock market. That means there were regular market drops over a 36-year period. It sounds grim, and there was certainly plenty of upheaval throughout the world during that time: two Gulf wars, 9/11, conflicts in Iraq and Afghanistan, and the worst financial crisis since the Great Depression.

But guess what? Despite all this, the market achieved a positive return in 27 of those 36 years. That’s 75% of the time.

This means that the long-term trajectory is likely to be good, even when short-term news is dismal and the market is getting smacked.

Fact 3: The good times are just around the corner

The worst market days are often closely followed by the best.

Being out of the market doesn’t just put you in danger of missing a surge; it also puts you in danger of missing the best returns.

Between 1996 and 2015, the S&P 500 returned on average 8.2% a year. But if you missed out on the top 10 trading days during those years, your returns would have dwindled to 4.5%. And if you missed the top 20 trading days? Make that a paltry return of 2.1%.

Not only that, but a study by JP Morgan has found that six of the ten best days in the market over the last 20 years fell within two weeks of the ten worst days. What does this mean? If you get spooked when times seem dark, you’re likely to miss out on the highest returns, which is when the patient investors make almost all their profits.

Market turmoil is an opportunity

These statistics are clearly stating that market turmoil isn’t something to fear; it’s actually a great opportunity to launch yourself into financial freedom. Market crashes aren’t the biggest danger; being out of the market is.

Jack Bogle nailed it when he said: Don’t do something – just stand there!

That’s it for this episode and our three-part series on the markets. It’s a fascinating area, full of myths and paranoia, so no doubt we’ll return to it at some point in the future. Until then, stay in touch and stay well.   

Make sure to call us on (03) 9835 3800 to book your personal appointment.


Please note this is general information only and you should always seek your own personal

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