The Most Inevitable Headline of All Time

After the Dow Jones (DJINDICES: ^DJI  ) hit a new record high this week, more than double off its 2009 lows, the Wall Street Journal published one of the most inevitable headlines of all time.

"Market Rewarded Those Who Stuck It Out," it read.

You don't say.

The only thing worse than suffering through a period like the last five years is suffering through and not learning anything from it. To me, there are three imperative investment lessons from the last five years. That "markets reward those who stick it out" is one of them.

For those who stuck out for the last five years, the 2008 crash -- literally one of the sharpest wealth destroyers in history -- is now a set of painful memories at worst, and a once-in-a-lifetime opportunity at best. If you did nothing, your portfolio is likely larger today than it was in 2007. If you bought steadily over the last five years, it's probably much larger. Only if you sold near the bottom and hid somewhere else have you lost money.

History is clear on this: Hold stocks for a long time, and your odds of making money are very high. Since 1871, there have only been four periods when an investor purchasing stocks didn't make money in real (inflation-adjusted) terms over a 10-year period: 1908, 1929, the late 1960s, and the late 1990s:

Source: Robert Shiller, author's calculations. 

If you purchased stocks once a month, every month, since 1871, 87.8% of your purchases would be profitable 10 years out, even adjusted for inflation. The four brief periods that left you in the red after a decade were invariably followed by above-average returns. That period includes the aftermath of a civil war, two world wars, a flu pandemic, terrorist attacks, droughts, presidential assassinations, depressions, recessions, crippling debts, bank runs, high inflation, deflation, oil embargoes and a dozen bubbles. Through it all, the market rewarded those who stuck it out. It is the same story time and time again. It was no different this time around, and it will likely be no different next time around.

What else did we learn of the last five years? One of my favorite quotes from investor Jeff Gundlach is, "In risk assets, you make 80% of your money 20% of the time."

During the 21,000 or so trading days between 1928 and today, the Dow Jones (SNPINDEX: ^GSPC  ) went from 240 to 14,000, or an average annual return of 5% (not including dividends). If you missed just 20 of the best days during that period, annual returns fall to 2.6% -- which is to say, half of the compounded gains took place on 0.09% of days. That's the numerical version of Gundlach's wisdom.

Sure, if you missed the 20 worst trading days, you would have done much better. But most of the 20 best trading days and the 20 worst trading days happen during the same periods, often during the same months. No one can time the market so perfect as to jump in and out at the exact right days. So what happens is that those who try to avoid the market's big drops tend to miss the market's even bigger gains. Those who sold when the Dow was at 8,000 may have thought they were smart when it continued to fall to 6,000. But when, before they knew it, it was back above 10,000, 12,000, 13,000, 14,000 ... and their attempt to time the market ended up costing them serious money. If you want to consistently enjoy the market's big gains, you have to put up with its declines from time to time. Trying to avoid that reality is one of the surest ways to earn poor returns. This, too, is the same story over and over again.

One lesson from the past five years is that the single most important question an investor can ever ask is, "How long am I investing for?"

If you're a day trader, a down day is a loss. If you're five years from retirement, a down year can be scary. If you're in your 20s and saving for retirement, a down decade means little. The same outcome during a given period of time can mean very different things for different people.

My view is that money you'll need to access within five years shouldn't be in the stock market at all, and money you won't need for at least a decade should not only be in stocks, but invested with the view that at some point it will almost certainly lose half its value (temporarily). Volatility is just part of the deal. It's perfectly normal. 

If you know you're investing for the long haul, these ups and downs -- even a severe crash like 2008 -- take on a whole new meaning. I think a lot of why so many investors cashed out and hid on the sidelines over the last five years is because they never even asked themselves how long they were investing for. A young worker with three decades before retirement saw markets falling, and his first instinct was, "Get out, now!" when it realistically should have been, "Look, never before in history has an investor lost money in stocks on a 30-year basis. And stocks are cheap right now. Even if they go down much further, it doesn't make sense to sell." On the other side, near-retirees found themselves caught off-guard when money they needed now suddenly lost half its value. So asking yourself how long you have to invest goes both ways. What's important is that there is never a blanket definition of whether or not you should buy stocks right now. Who you are and how long you have to invest can create two different rational answers at the same time.

Someday, this will all happen again. More recessions, more crashes. And when it's all over, the same headline -- "Stocks reward those who stuck it out" -- will be published yet again.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 

Read/Post Comments (14) | Recommend This Article (88)

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  • Report this Comment On March 08, 2013, at 1:06 PM, GhostdogWarrior wrote:

    Thats if you are talking people that purely hold stock. The reality is most people by Funds and the expense ratios tied with it, dont even bring you close to breaking even unless you are solely in index funds.

    So lets say they are back to even, you lost almost 6 years and if you were in, in 2000, you got next to nothing over the last 13 years.

    But if you sold in 2007 and bought in 2009 you were the big winner. Sorry Im not a buy and hold believer in most instances (occassionally, maybe) I think you are way better off buying low and selling high, but that's me

  • Report this Comment On March 08, 2013, at 3:50 PM, TheDumbMoney wrote:

    GhostdogWarrier, I think everyone agrees you are way better off buying low and selling high, it's just that nobody can do it.

  • Report this Comment On March 08, 2013, at 4:41 PM, TMFDarwood11 wrote:

    "So lets say they are back to even, you lost almost 6 years and if you were in, in 2000, you got next to nothing over the last 13 years."

    Perhaps, but if your investments include dividend paying stocks (even an S&P index fund does), then it isn't quite as bad as you make it sound. Vanguard VTSMX has 0.17% expenses and yields 1.89%.

    Or if you want more dividends, you can go for VDIGX, but the fee is higher.

    Even Vanguard's 2025 target retirement fund VTTVX, which includes bond and domestic/international stock funds has a yield of 2.1% and a 0.17% fee.

    I don't know how to consistently "buy low and sell high." There was a time when I tried to time the market, and had some successes, but also some failures. In the end I decided I would be better off going for consistency with some specialty investments to spice up what would otherwise be a pretty ho-hum portfolio. So I added international bond fund, REITs, a commodity fund, some GLD and inflation protected bond fund. I also decided to put about 15% of my investments into individual stocks, mostly dividend payers.

    I have no complaints.

  • Report this Comment On March 08, 2013, at 9:33 PM, xetn wrote:

    Lets look at inflation adjustment of the Dow. For example, consider that the Dow will purchase about 3812 gallons of gasoline, but in 1999, the Dow would have purchased 10718 gallons.

    Where is the real gain in the dow?

    Or, what about the Dow priced in Gold?

  • Report this Comment On March 08, 2013, at 10:20 PM, whahoppened wrote:

    xetn, not good references.

    Best I remember was 60 years ago in a farm magazine Successful Farming. How many hours of work does it take to buy a thing (or service). Think of money as excess work that's in storage.

  • Report this Comment On March 08, 2013, at 11:57 PM, xetn wrote:


    Money is nothing but a unit of exchange. It is involved in every transaction of buying and selling. What my stats indicate is the decline in the value of the US dollar because the Dow, Gasoline and Gold seem to be priced in USD. So, when the value (purchasing power) of the the USD declines due to massive money creation by the likes of the Federal Reserve, the value (purchasing power) of the the USD tends to decline relative to other goods and services.

    As for gold (and silver) they have been money (freely chosen by the free market) for several thousand years.

    No fiat (paper) currency has ever lasted.

  • Report this Comment On March 09, 2013, at 12:18 AM, xetn wrote:

    Why gold as money:

    Gold has qualities desirable in money—it is rare, durable, divisible, fungible (each unit is exactly identical and equivalent to other units of gold), easy to identify, and easily transported and possesses a high value-to-weight ratio.

  • Report this Comment On March 09, 2013, at 12:28 PM, kyleleeh wrote:


    You can use any product you choose and come up with different results.

    Comparing the Dow to how much processor speed it will buy shows the Dow has more than doubled in value every two years.

    Gold is not a good measures for inflation because most people spend very little of their income on gold. I have spent far less then 1% of my income on gold in the last 5 years, it's price rise has no effect on my cost of living.

    <<No fiat (paper) currency has ever lasted>>

    No gold based currency has ever lasted either, not one country in the world has a gold based currency to date. Every precious metal based currency ever devised has ended up abandoned.

  • Report this Comment On March 09, 2013, at 12:51 PM, TMFMorgan wrote:

    <<Lets look at inflation adjustment of the Dow>>

    Yes, let's:

  • Report this Comment On March 11, 2013, at 12:02 PM, catnapper06 wrote:

    Let's not forget Robert Shiller:

    Two sides to every story.

  • Report this Comment On March 11, 2013, at 12:53 PM, TMFTheDude wrote:

    Great article Morgan. Thanks for the insight, especially one that gets all too often overlooked by investors.

    Keep it up!

  • Report this Comment On March 12, 2013, at 10:43 PM, TerryHogan wrote:

    @catnapper06 - Interesting article thanks.

    When I read the headline of this article, I thought the most inevitable headline of all time would be "Market hits new record high". And as the Robert Schiller piece mentions, this has happened more than 1000 times for the S&P. I guess that's basically the same as being rewarded to wait. (yes, you have to factor in inflation, I get it guys, we don't have to talk about guns, butter, gold, and the cost of an Ipad)

  • Report this Comment On March 19, 2013, at 7:26 AM, badfish718 wrote:

    If you invested back in the 1940's in a theoretical DJIA-linked fund that did not practice dividend reinvestment, your gains are minimal at best.

  • Report this Comment On March 19, 2013, at 8:09 AM, TMFMorgan wrote:

    <<If you invested back in the 1940's in a theoretical DJIA-linked fund that did not practice dividend reinvestment, your gains are minimal at best.>>

    Without dividends the Dow increased from 126 to 14,500, or more than 100 fold, from 1940 to 2013. In real terms it was a gain of 7.5 fold.

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