Investing in the stock market can be a rollercoaster ride, especially when volatility spikes. However, understanding key market principles can help investors stay the course and make informed decisions. Here are 10 crucial facts to keep in mind when navigating market turbulence.
1. Over Time, the Stock Market Goes Up
Historical data shows that despite short-term fluctuations, the stock market trends upward over the long term. On any given day, the market rises about 53.7% of the time. Additionally, gains on positive days tend to be slightly higher than losses on negative days. (Source: ETF Institute) This is no coincidence, as corporate earnings, which drive stock prices, generally increase over time.
2. The Market Ride Will Not Be Smooth
Short-term volatility is inevitable. Just as an airplane encounters turbulence, investors must be prepared for market ups and downs. However, these short-term fluctuations do not define the long-term trajectory of the market.
3. You Can’t Avoid the Bumps - You Must Prepare for Them
Timing the market is notoriously difficult. To profit from market timing, an investor must be right twice - when to sell and when to buy back in. A 2016 study analyzing 6,582 market predictions found that after accounting for costs, no market timer consistently made money. (Source: Antoons, Market Timing: Opportunities and Risk, 2016) Instead of trying to avoid downturns, it's more effective to prepare for them with a long-term investment strategy.
4. Stock Market Perfor-mance Is Driven by a Few Good Days
Missing just the 10 best days in the stock market over a 20-year period could reduce returns by 64%. These 10 days account for only 0.2% of all trading days. If an investor missed the 20 best days, their returns could turn negative. (Source: ETF Institute) This highlights the importance of staying invested rather than attempting to time the market.
5. A Handful of Stocks Drive Market Performance
A study examining stock market performance from 1926 to 2016 found that the top 4% of stocks accounted for the entire net gain of the market. Just five companies - ExxonMobil (XOM), Apple (AAPL), General Electric (GE), Microsoft (MSFT), and IBM - accounted for 10% of the market’s total gains. (Source: ETF Institute) This reinforces the value of broad diversification to ensure exposure to the biggest market movers.
6. You Must Be Present to Win
Many investors focus on avoiding bad days, but it is more important to ensure participation in the market’s best days. Historically, bear markets have lasted an average of 1.3 years, while bull markets persist for an average of 6.6 years. (Source: ETF Institute) Staying invested helps capture long-term gains that outweigh short-term losses.
7. Diversification Helps
Different asset classes perform differently over time. Diversification ensures that while some investments may be underperforming, others could be thriving. A well-balanced portfolio that includes a mix of stocks, bonds and other assets can help mitigate risk and enhance long-term returns.
8. Active Managers Rarely Generate Persistent Outperformance
Even the world’s most successful investor, Warren Buffett, recommends index funds over actively managed funds. Despite having vast resources, even the best fund managers struggle to consistently beat the market. Index funds offer an easy and cost-effective way to achieve market returns without excessive risk.
9. Fees and Expenses Matter
Investment costs, such as expense ratios, trading commissions and advisory fees, compound over time and can significantly impact returns. Studies show that lower expense ratios are a strong predictor of higher long-term performance. Managing costs effectively is one of the easiest ways to enhance investment returns.
10. Nothing Works All the Time
Even time-tested investment strategies experience periods of underperformance. Investing is a statistical exercise, not an intuitive one. The key is to focus on long-term principles and maintain discipline, knowing that while short-term fluctuations are unpredictable, long-term trends favor patient investors.
Market volatility is unavoidable, but understanding these 10 fundamental principles can help investors stay confident and committed to their financial goals. By focusing on the bigger picture, staying diversified, minimizing costs and avoiding the temptation to time the market, investors can navigate uncertainty and achieve long-term success.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.
Asset allocation does not ensure a profit or protect against loss.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which invest-ment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.