FYI: Here is a basic truth: stock prices rise and fall.
Of course, literally speaking, this statement is true. But it's misleading. That's because the statement is incomplete; it's not really accurate to say that stock prices ''rise and fall.''
Oh, sure, on any given day, prices might rise or fall. But over long periods, it's more accurate to say that prices in the overall stock market rise a lot but fall a little, as shown in the image.
This chart clearly shows that when stock prices are rising, they rise a lot and for a long time.
When prices fall, they fall a little and for a short period.
This explains the real reason why the stock market is able to exist.
Regards,
Ted
https://www.edelmanfinancial.com/education-center/articles/the-most-important-chart-on-investing-youll-ever-see
Comments
You'll notice that all of Mr. Edelman's up periods begin at zero, they don't begin at the negative point where the "little itty bitty down" finished. Somehow he assumes that if you rise 50% after a 30% decline, you're up 50%.
Uhhh ... down 30% then up 50% gives you (a) an ulcer, (b) vertigo, and (c) a net gain of 5% over the complete cycle.
David
Hmm, not sure his way of looking at it is not more useful, maybe even more accurate. Yo-yoing while walking up a hill seems to capture it. You may be inadvertently sounding here like a non-longterm investor. One response to your description is 'So what? Don't watch it, don't track it.'
I’ll grant that stocks rise more years than they fall (over long periods). But downdrafts can be long and painful. Look how long it took the NASDAQ to get back to 5,000. A lot of folks bought in at the highs in ‘98-‘99. And as David explained - A 50% down year followed by a 50% up year leaves you with 75%.
Totally unrelated I guess ... but look at how many years interest rates have been falling. Unless you expect them to go negative in this country, we’ve probably already seen the best days (for rates).
Hmmm ... my concern is the implication that your total return in the current market cycle is 231%. That comes about because the bull market is disconnected from the bear portion of the cycle. From 2000-2010, the market's net return was zero which is not evident from the chart.
You, and he, are right: markets go up in 3-4 times as many years as they go down. But if you gloss over the ugly fact that the recovery periods for many funds was five or six years (DODGX took 63 months to return to zero following its max drawdown in the current cycle), you're ill-preparing them to be the long-term investors you might seek.
David
k, point taken, I guess.
I did not read Rice Delman so episodically and implicatively and glossily as you, but maybe that's because for years I have been hearing him whinge on about the long term.
>> From 2000-2010, the market's net return was zero
We have to be careful about, hmm, what's a good word for larger-scale cherrypicking?
For some reason the decade you cite was a decisive argument for active management. SP500 sucked majorly, yes, but when you look at some big favorites sometimes cited here at MFO --- FCNTX, FLPSX, TWEIX, FPACX, PRWCX, VWELX, DODGX, and WEMMX, say --- the total from a $10k investment ranges from just under $14k to more than twice that (the two Fido funds, coincidentally). Those results only improve if you include 2010 rather than ending 1 Jan 2010.
Naturally you had to have held them for the long term. (Many bailed out of FCNTX sometime in 01 or 02, and even more did likewise with all of them save First Pacific in 08-09. )
So sleep through volatility if you have faith. Easy to prescribe. And right, no glossing, no ill prep.
The marketplace generates a ton of data. Tables and charts are a great way to summarize these overwhelming data sets. The charts can be designed to highlight selected elements in a manner that the author wishes to emphasize his point of view. Some charts work well while others fail to achieve their goals to their target audience. Regardless, they are all simplifications.
I really liked the referenced chart. From my perspective it effectively made the points that Ted reported. It might not be so effective for other readers, depending on goals, experience and education. Here is a Link to another article that presents an array of charts that purportedly do the same task:
http://www.businessinsider.com/charts-that-explain-stock-market-2016-2/#the-stock-market-can-wipe-you-out-1
In this instance, the same author attempts to explain the market using 16 charts. Most important is likely an exaggerated claim in either case. The "most important" claim is a way to get published.
Lots of data scatter is shown in these charts, suggesting something less than a perfect prediction parameter in terms of its market explanatory power.
No great surprises here, but a lot of fun anyway. We all seek a better way to make investment decisions. Both of these articles make a little contribution to a better understanding of what's important and what is less so in the investment decision-making process.
Happy New Year to all.