Especially these days, it’s easy to be a pessimist. Bad news tends to dominate at the best of times, but it does seem like there’s currently more of it than usual.
As citizens, we of course can’t be willfully blind to what’s happening in the world. And as investors, we must be attuned to risks that could affect our portfolios.
Yet even—or indeed—especially when there are so many discouraging headlines, it’s imperative that we stay optimistic. In fact, we would argue that an overarching sense of optimism is integral to long-term success as an investor.
The Trend is Your Friend
If you look at a chart of the stock market over history, one thing is crystal clear: The trend is higher. That’s not to say, of course, that there aren’t hiccups or much worse along the way: 2008 and now 2020 serve as compelling reminders that yes, stocks can go down, and sometimes a lot.
But these plunges historically have been temporary, though of course it never feels like it at the time. At some point they reverse, and turn out to be have been wonderful buying opportunities for those with steely nerves.
Why do you markets usually go up as the years go by? In a nutshell, economies grow, and with that growth comes higher corporate profits. Hence, rising equity markets.
The Longer the Horizon, The Better Your Odds
It’s been famously said that in the short term, the market is a voting machine, meaning it’s subject to the whims and emotions of investors. But over the long term, it’s a weighing machine, which is to say equities eventually reflect their true value.
With this in mind, it’s worth re-visiting a stat we’ve mentioned before: From 1926-2015, the chance that the market was up on any given day was 54% (basically a coin toss). Meanwhile, 74% of years saw positive returns for equities. But here’s the amazing thing: over any 20-year horizon during this period, every single one was up. Past performance isn’t a guarantee of future returns, as many a disclaimer will tell you, but the longer your time horizon as an investor, the better your chances of success.
Your Situation Matters
It’s important to keep in mind, however, your particular goals and financial situation. Let’s say, for example, that you’re close to or already in retirement. In this case, even though equities do tend to perform well over extended periods, it may not be appropriate for you to have an outsized allocation to them. Conversely, someone in their 30s or 40s can probably afford to take on more risk, as they likely won’t need to draw from the capital for at least two to three decades.
Use Volatility to your Advantage
Big market drops and scary predictions of more pain to come are never fun to see. But the next time the market does take a big dive, remember that it, too, shall pass, and the sea of red you see may actually be an ocean of opportunity in disguise.