Long-term benefits of Stock Investing: Why you need to have equities in your portfolio
There is no denying: stock markets are indeed volatile, and your daily newsfeed about what equity markets were up to over the past 24 hours can sometimes resemble a casino-like experience. And don't get me started on describing the gut-wrenching daily volatilities in meme-stocks like Gamestop or AMC. Avid readers of our blog will know that this is exactly the reason why you should always be fully diversified and why you should never take on title-specific equity risk. But that is a story for another day.
When looking at the long-term growth trends of asset classes, it becomes crystal-clear that equities need to be part of any investor's portfolio:
Please bear in mind that the picture above utilizes a logarithmic scale on the Y-axis, making the truly spectacular growth of one hypothetical US dollar invested in 1926 into four different asset classes even more impressive (Small Cap, Large Cap, Long-Term Bonds, Short-Term Bonds; see the top 4 curves in the picture above). It becomes clear that equity investments are the "rocket fuel" in anybody's portfolio.
Eagle-eyed investors will see lots of jagged, non-smooth spikes in the small-cap, large-cap and long-term bond curves depicted above. Remember, the picture above depicts 94 years, hence the gut-wrenching equity volatility in any given individual year gets blurred out in the long-term picture above. That is the reason why only the most risk-tolerant investors should ever be invested in a 100% equity portfolio and that is also the reason why we mix in short-term government bonds into the portfolio of most investors to smooth out the equity volatility ride. After all, you will need to be able to sleep soundly at night and not worry about your portfolio.
So let's have a look at the actual market cycles over the past 94 years of recorded equity returns:
The informed reader will quickly see at a glance that Bull Markets (Blue) are the dominant characteristic vis-a-vis Bear Markets (Amber).
The good times of the Bull Markets have collectively outshined the bad times, without a doubt:
From 1926 through 2020, the S&P 500 Index experienced 17 bear markets, defined as a fall of at least 20% from a previous peak. The declines ranged from —21% to —80% across an average length of around 10 months.
On the upside, there were 18 bull markets, or gains of at least 20% from a previous trough. They averaged 54 months in length, and advances ranged from 21% to 936%.
When the bull and bear markets are viewed together, it is clear that equities have rewarded disciplined investors.
So what is all the fuzz about the constant talk regarding Bull Markets and Bear Markets and what was so special about the Covid-19 induced quick Bear Market in Q1 2020? Well, it turns out that the most recent Bear Market from March 2020 was indeed the quickest Bear Market in history, i.e. the speed of decline until an equity loss of 20% or more had been achieved was unrivaled and required a mere 19 trading days:
So what can you, as an individual investor, do to steer through Bull and Bear Markets, you ask? Well, the stock market's ups and downs are unpredictable and Bear Markets are able to dish out sucker-punch-like stomach churns. Nevertheless, history supports an expectation of significant positive equity returns over the long term. In order to increase your odds of participating in market returns, you have to stay the course at all times. And that is where a sound, academically-rooted investment strategy in accordance with your risk profile becomes the cornerstone of any investor's portfolio. If you need more information about such a strategy, please visit the following blog articles in the following order:
Source for Bull/Bear picture quoted in the article above: By Eva K. - Eva K., CC BY-SA 2.5, https://commons.wikimedia.org/w/index.php?curid=824045