Ronald Reagan once said that the problem with some of his opponents was that they “know” so many things that simply are not true. That simple statement applies to stock market lore, and therefore bodes poorly for successful investing. Let’s see if we can identify some truths that could pay dividends (pun intended) for all of us.
Truth #1 - Overall, market up-year gains produce more than double the down-year losses. That’s why and how the DJIA got above 20,000! It can be frustrating to go through the down years, but the simple facts should assure us that the best thing we can do is to hold and be patient. We know, it is difficult!
Truth #2 - Investors suffer from “recency bias,” meaning that whatever is going on recently, we tend to expect that to continue. But is it valid? Not even close! In fact, since World War II, the market has only had back-to-back down years three times.
So, what are we afraid of when investing? How about these:
- 2008 – global financial crisis
- 2000 – tech bubble – NASDAQ peaked at 5048
- 2001 – attacks on 9/11
- 1997 – world currency crisis
- 1989 – 92 S&L Crisis
- 1987 – Wall Street panic
- 1973 – Arab Oil Embargo
- 1962 – Cuban Missile Crisis
- Prior to that – Wars, Depression etc.
Scary things, all of these, but look what we’ve done. Since my birth, the DJIA is over ten times higher (1000% is a great big number). Yet we have suffered through several scary declines during this period, only to reach record highs time after time.
Truth #3 - Many people have heard the description of Economics as the “dismal science,” because economists seem to love forecasting bad news. As an economist of sorts, I understand completely. It is far easier to study the country, the economy, the world, or whatever, and to see potential problems looming.
Truth #4 - A long-term outlook is absolutely necessary to successful investing. Otherwise, poor decisions will be made, compounded, and regretted. No one is fast and nimble enough to react to daily changes, and no one is prescient enough to predict trend changes accurately. Diversification is the best we can do to take advantage of the good, while shielding our money as much as possible from the bad.
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