3 Guarantees for the Stock Market Today

There's not much to be certain about in life, and in many ways that includes the stock market today. Still, there are a few guarantees that the stock market offers. Be sure you're aware of them before investing in it, lest your performance suffer.

Guaranteed volatility
One thing that you'll find in the stock market today has always been there: volatility. On any particular day, the market can soar or swoon. A glance at the Dow Jones Industrial Average's biggest one-day gains and losses confirms this: On each of two different days in October 2008, the Dow surged more than 10%. On each of eight different days in late 2008, the Dow gave back more than 5%. 2008 was a particularly volatile year, but big moves can happen any time. In 2011, the Dow gained more than 4% in a single day, and lost more than 4% on another. Those were moves of roughly 500 points.

It's not just the overall stock market today that's volatile: Individual stocks can be even more zigzaggy. Consider audio-chip maker Cirrus Logic (NASDAQ: CRUS  ) , which supplies many of Apple's (NASDAQ: AAPL  ) iDevices. Between April 16 and April 18 of this year, the stock tanked by more than 17%, and it lost about 20% on May 23. Why? Well, about 90% of its revenue is tied to Apple, and Apple's position in the stock market today isn't what it used to be, with Steve Jobs gone, growth slowing, and margins being pressured. In mid-April, Cirrus warned of disappointing upcoming results, and got punished for that. In May, management cited profit-margin pressures of its own, along with competition and a maturing smartphone environment.

If you're not prepared for volatility, you might get out of a solid stock or the overall market prematurely, not giving it a chance to recover and perform well. 

Guaranteed uncertainty
Meanwhile, the stock market today also offers guaranteed uncertainty when it comes to the kind of growth you can expect. Parking your money in the S&P 500 index of 500 leading American companies for a decade might seem like a great way to enjoy some ups and downs and come out ahead overall -- and there's a good chance that that will happen. But still... check out these 10-year results, per data from S&P Dow Jones Indices:

Decade ending in

Total return

2012

62.1%

2011

9.5%

2009

(24.1%)

2002

101.9%

2000

299.8%

Clearly, even over a decade, results can be extremely varied. You might double or triple your money, see it not grow much, or see it fall by a significant amount. On the plus side, though, you're much more likely to experience growth over a decade than you are a loss.

Guaranteed less attractive alternatives
Still, looking at the numbers above might have you deciding to forgo the stock market today, seeing it as too unpredictable. You might find yourself leaning toward other options, such as bonds or CDs or real estate.

Think twice about them, though. It is smart to diversify your portfolio, but there's a good chance that stocks will boost it the most over the long run. Consider CDs. They do offer virtually guaranteed returns, but good luck finding interest rates that will beat inflation's long-term annual average of 3%. Most five-year CDs are yielding much less than 2%.

Want bonds? Check out these statistics from Wharton Business School professor Jeremy Siegel, reflecting on how often stocks outperformed bonds over various rolling periods between 1871 and 2006:

Holding Period

Percentage of Time Stocks Beat Bonds

1 year

60.3%

5 years

71.3%

10 years

82.4%

20 years

95.6%

30 years

100%

Source: Jeremy Siegel, Stocks for the Long Run.

Real estate? According to data from the National Association of Realtors, real estate, on average, has grown by about 5.5% annually over many decades. That's just an average, though, as returns can vary widely depending on where and when you buy and sell. It's also a smaller average than the stock market's long-term annual average, which is close to 10%.

There's a lot to like about the stock market today, and it makes good sense for most people to invest at least some of their nest eggs in it. But they should do so with their eyes open, aware of the important guarantees above.

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