SUMMARY:
Did you know that outside of Bear Markets that the stock market returns about 15% per year? And did you also know that the stock market provides excellent returns about 86% of the time?
Bear market declines only represent about 14% of trading cycles on average. But bear market crashes happen about once every seven years. For this big problem (bear market crashes) that only happens occasionally, the investment world has come up with a small number of solutions that only hurt your long-term investment results.
STOCK MARKET HIGHS AND LOWS
The stock market is a great place to invest your money in the long term. The stock market has produced more wealth, and more millionaires than any other asset class in history. In the long term there is very little risk when investing in the broad stock market. Individual stocks can and do go to zero, but the broad stock market always goes up in the long term. The only danger associated with investing in the broad stock market are those painful and annoying Bear market crashes. They happen about every 6 to 7 years on average and these bear market declines can generate losses of 40% or 50% of your investments. The table below shows the stats from the worst bear markets from the last 50 years. The market always bounces back from these declines, but it can take up to seven years to get back to even.
Bear markets have two components - the crash and the recovery. The declines or crashes last about 11 months on average. Some crash periods have been very short like the Covid Crash of 2020 and some take a long time like the financial collapse of 2008. The recovery leg of a Bear market lasts two or three times as long as the crash. The rebound or recovery phase can be very powerful and can produce some big gains. All our worries about stock market investing are associated with the Bear market crashes.
But if we separate out the periods when stocks are crashing in Bear markets from all other time periods, the Bear market crash only represents about 14% of stock market trading cycles. The other 86% of the time, the stock market (as measured by the S&P 500) is climbing by about 15% per year on average. On an annualized basis, stocks lose about 39% of their value in the Bear market crash cycles. So, 86% of the time, investments are growing very rapidly (15%) and only 14% of the time are stocks losing money.
THE OTHER PROBLEM WITH BEAR MARKETS: TIME
It is bad enough that bear market declines are so severe, but the other issue with bear markets is time. Bear markets are not short-term events, typically. If we look back 50 years, the average duration of a bear market is about 4.5 years. This counts the time between the previous peak and the recovery back to that peak. So, your money basically earns nothing over 4.5 years (not including dividends). On the high end, the 1970’s bear market lasted 7.5 years and the 2000 crash lasted 7.2 years. The 2020 Covid crash was quick, lasting only six months. The crash itself takes an average of 15 months from peak to bottom. The longest declines in the last 50 years happened in the 1970’s (2.5 years) and the early 2000’s (1.8 years). The shortest once again was the Covid crash of 2020 which went from peak to bottom in only about one month. The current bear market (as of this posting) is only about 9 months at this point, but it is following the pattern of the 1970’s bear market, unfortunately. So, in addition to dealing with the pain and suffering of investment losses of 40%, equity markets can go nowhere for as long as seven or eight years or more.
Date of Prev. Peak | Date of Bottom | Time to Bottom (months) | End of Bear Market | Bear Market Duration (yrs.) |
1/5/73 | 10/3/74 | 21 | 7/14/80 | 7.5 |
8/25/87 | 12/4/87 | 3 | 7/26/89 | 1.9 |
3/24/00 | 10/9/02 | 31 | 5/18/07 | 7.2 |
7/13/07 | 3/9/09 | 20 | 3/6/13 | 5.7 |
2/19/20 | 3/23/20 | 1 | 8/18/20 | 0.5 |
AVERAGE | | 15 | | 4.5 |
THE WRONG SOLUTIONS TO THE PROBLEM
Because the crashes are so severe (-39%), we are told to put 40% of our money in bonds. We are told to diversify our investments into international equity markets and commodities. The theory is that these other asset classes will not fall as much during bear market crashes and can, therefore, cushion the blow. The only problem is that this is not always true and the S&P 500 has always beaten the other asset classes over the long term. So, the investment community has sold you on the benefits of asset allocation and it doesn’t really work.
THERE IS A BETTER WAY: BEYOND BUY & HOLD
There is now a much better way to invest where you can achieve the high long-term returns of the stock market and lower your risk. Imagine fully capturing those 15% annual gains and not having to worry about Bear market crashes. The Beyond Buy & Bold system can produce investment returns that are double what you are getting from the traditional asset allocations. And, even better, you get the peace of mind of knowing your savings are protected against those inevitable stock market collapses. Learn more by checking out our Market Signals investing service.
Happy Investing,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
The earlier you start saving for retirement, the less money it will take as a percentage of your income to achieve your goal. The opposite is also true, unfortunately. The less time you have, the higher percentage of your income you’ll need to contribute to achieve your goal.
This is due to the power of compound interest. The important lesson of compounding is that you should start saving and contributing to your 401(k) as early as possible. There exists an incredible window of opportunity for maximizing the power of 401(k) plans from your early twenties until your late thirties.
Every investor needs to fully understand compounding and how to benefit from its amazing power. This is another one of those things that everyone should learn in high school.
This graph below shows the balance of a 401K where the individual started contributing at age 25 and contributed an equal amount each year. The annual investment return rate or growth rate is also constant. So, the only factor affecting the slope of the line is compounding. Notice how the line start curving straight up after age 50. This is the compound effect.
A 401K investor can affect their retirement account balance the most by starting to make contributions as early as possible – in their 20s or 30s – and by generating higher investment returns through their fund choices. Compounding multiplies the impact of earlier contributions and higher investment returns. This is not the case when you increase the amount that you contribute to your 401K.
I have quantified the comparison of time length, investment returns, and 401K contributions illustrate this point.
Everything else being equal:
A 33% increase in number of years contributed leads to a 103% increase in the account balance at age 65.
A 33% increase in investment returns leads to a 78% increase in the account balance at age 65.
A 33% increase in employee contributions leads to a 33% increase in the account balance at age 65.
Start early and maximize your investment returns to ensure that you have enough money to retire at age 65.
Happy Investing,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
Updated: Nov 30, 2023
How do you decide which funds to pick for your 401K or IRA account?
Are you confident or comfortable with your fund picks?
Most people do NOT have a disciplined or logical process for their fund selections. Ask ten ordinary investors how they make their picks, and you will get ten different answers. Ask ten investment professionals, and you will also get lots of different answers.
Some people:
Follow the advice of their HR representatives or their 401K administrators.
Are so afraid of losing money that they put their money in bonds and cash.
Are overconfident in their investing abilities and move their money around based upon their own market forecasts.
Follow the advice of financial professionals and spread their money across a variety of different assets – small cap stocks, large cap stocks, international stocks, mutual funds, bonds, and more.
The variety of approaches and the different investment strategies are a clear indicator of how dysfunctional the investment industry is. And none of the approaches listed above will generate enough growth for you to retire comfortably or securely.
With so much data and information available, the fund selection process should be disciplined and consistent. It should be pretty simple and straightforward. And it can be. The investment industry and the financial media make the process much more complicated than it should be.
Put very simply, you should be selecting your investments based on CONSISTENT AND RELIABLE LONG-TERM RESULTS. It should be all about the numbers – about which investments have the best odds of producing the best and most consistent returns in the long run.
It all comes down to what makes one investment better than another. There are only a few factors to consider when comparing investment options.
Expected long-term annual rate of return – the growth rate you can expect from an investment.
The consistency and the predictability of the expected returns.
The risk of losing money in an investment.
How well you understand the particular investment.
The most important statistic to measure any investment is its annual rate of return. For example, a bank savings account that pays 4% per year has an annual rate of return of 4%. For any investment, data is readily available regarding its annual rate of return over various time periods. Notice how I just introduced another factor into the equation – the time period to evaluate.
For investments, unfortunately, people too often look at very recent or short time periods to evaluate performance – for example, six months or the last year. Six-month performance or one-year performance does not tell you much about an investment. Most people will have their retirement accounts for 30 or 40 or 50 years. When you are comparing investment performance, therefore, you want to look at performance over at least 20 years and even 30 or 40 years.
The next factor is consistency. Let’s say two different investments (fund A and fund B) have similar annual returns over the last 20 years – both at around 8% per year. But the fund A achieved those 8% returns much more consistently than fund B. Consistent results are much more reliable when projecting future returns.
The next factor to consider is the risk of losing money. And the most important risk is long-term risk of suffering permanent losses. Most investments carry the risk of short-term losses because all financial markets are volatile. But individual stocks can and do suffer permanent losses when companies go out of business or lose sales to a competitor. Commodities can and do suffer long-term losses when they get replaced by other commodities. 401K and IRA investors should avoid any investments that could suffer long-term or permanent losses.
Let’s now cover the last factor to consider when picking your investments – how well you understand the individual investment. Understanding an investment is not just about knowing what it is, it is also about knowing why it increases or decreases in value.
I am totally convinced that S&P 500 index funds will grow by an average of 9% per year in the future because I believe that their profits will increase at a similar rate. The profits of the companies that make up the S&P 500 have grown by 8.7% per year over the last 50 years. And a 9% increase in profits for any company is not a big number. It is very realistic.
But I have no idea why the price of bitcoin goes up or down and nobody else does either.
When you don’t understand an investment, you do not have any conviction about holding on to that investment. Your buy and sell decisions end up being totally emotional.
Happy Investing,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
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