THE AMAZING STOCK MARKET

For centuries, the United States stock market has been the best place to invest your money compared to just about every other investment. The U.S. stock market has produced more millionaires and more billionaires than any other asset class.

The table below shows the average annual returns of the S&P 500 and the Nasdaq over various time periods.

Over long time periods, the S&P 500 produces annual returns of somewhere between 9% and 11% including dividends.

The Nasdaq tends to outperform the S&P 500 by about 1% to 2% per year over time. The returns for the Nasdaq-100 are even higher.  But the Nasdaq tends to be more volatile than the S&P 500. It tends to drop by a higher percentage in bear markets, but it also tends to increase more in bull markets.

LOTS OF STOCK MARKET INVESTMENT OPTIONS

There are, however, thousands of choices when it comes to the stock market.  Because of this, it can be confusing when people talk about the stock market or stock investments. To reap the benefits of stock market investing, you can invest in individual stocks, mutual funds, index funds, international stocks, growth stocks, value stocks and more. 

Having all these options makes the investing process more confusing for most people.

You’ll hear lots of reasons why you should be investing in many or all of the different types of stock investments listed above.  But you should ignore this noise. The truth is that the S&P 500 and the Nasdaq beat all the other options in the long run. 

No mutual funds (individual stock pickers) can beat the S&P 500 over long time periods (10 years or more). International stocks can’t match the returns of the S&P 500 in the long term. The S&P and the Nasdaq are considered large-cap stock indices, and large-cap stocks beat mid-cap and small-cap stocks. Value stocks and growth stocks might have strong performance during particular time periods, but nobody can accurately predict when that will be. 

There is a dark side to the stock market, however.

Individual stocks can lose their value and stay down. Some stocks can and do go to zero if the company goes out of business, but the aggregate markets as represented by the S&P 500 and the Nasdaq don’t go out of business or go to zero. 

The stock market crash of 1929 was legendary. Investors were wiped out in a short period of time as the stock market dropped by 50% in a matter of weeks. Over two and a half years, from late 1929 to mid-1932, the stock market lost almost 90% of its value.

While we haven’t seen anything like the 1929 crash since then, there have been plenty of difficult and painful bear markets. The 2022 bear market saw declines of 25% to 35%. In the painful market crashes of 2000 and 2008. The S&P 500 dropped by 48% from 2000 to 2002 and fell by 56% between 2007 and 2009. The Nasdaq declined even more than the S&P 500. Watching our 401(k) accounts get cut in half was an awful experience.

When you invest in the stock market through an index fund representing the S&P 500, you can be extremely confident that the value of that investment will grow significantly in the long term. You can be much more confident in the increasing value of your stock market investment than you can be in the performance of bonds or commodities or real estate in the long term. And you can be much more confident in the performance of the S&P 500 than you can be any specific individual stock’s performance. 

Why is that necessarily true? How can we be so sure of the gains from the stock market in the future? What do stocks have going for them compared to the other asset classes?

Our entire political and socio-economic system is designed for companies in the stock market to succeed. Let’s look at the incentives that help to propel the stock market higher over time:

• All 500 companies in the S&P index have tremendous incentives to grow. The management, board members, shareholders, and employees all have huge incentives in place for those companies to be successful.

• Local, state, and national governments are incentivized for those companies to grow. Tax revenues and job opportunities benefit all government entities.

• The general population wants good-paying jobs in their communities.

• Investment capital flows to growing and successful companies.

The incentives that drive the stock market are not in place for bonds, commodities, or real estate. Most people would prefer that the price of commodities and real estate remain constant or even go down. Consumers and governments don’t like price increases. Look no further than the inflation challenges we face right now. Most people would prefer that interest rates on bonds were lower rather than higher. Higher rates limit borrowing, which inhibits economic growth. There are people who benefit when prices increase, but they’re in the minority. 

The other factor to consider is innovation. It’s innovation and productivity that drive the increase in company value and, therefore, the stock market. We have a highly innovative and productive economy, and I see no reason for that to slow down in the future. One could even argue that innovation is accelerating rather than slowing down.

The only factor I see that could get in the way of the 8% to 9% continued annual growth of the stock market would be a collapse of our political system. Given the events of recent years, one can’t totally rule that out. But even in the most extreme political upheaval, the same incentives for market growth should still be in place. There is way too much money at stake. Major political disruption would likely have a massive short-term effect on the stock market. But I firmly believe that after a period of time, the stock market will continue growing. 

The stock market is a tremendous way to grow wealth.  But investing in the stock market is even better with our Beyond Buy & Hold system.  Our Beyond Buy & Hold system protects investors from major short-term collapses regardless of the reason. You can get the best of both worlds.  You can get excellent long-term growth from stocks and protection against losses. You need a better approach than simply “riding it out” during stock market meltdowns.

Who wouldn't want annual returns of 10% to 14% per year AND protection against losses during bear market crashes?

Happy Investing,

Phil

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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.