Image source: Pixabay.
August was a wake-up call for investors. For the first time since October 2011, investors woke up to the stock market being in correction territory. Officially, that's a drop of 10% or more from its recent highs.
After years of upside this came as a shock to investors, but the pessimism has long since subsided. In fact, the broad-based S&P 500 is now just 2% below its all-time high of 2,134 after touching 1,867 in August. To the novice investor and/or day trader, these moves may look downright terrifying -- so much so that some investors may be avoiding putting their money into stocks or mutual funds . A Goldman Sachs poll conducted earlier this year suggests that few millennials trust the stock market, even if they realize that it gives them their best chance of reaching their retirement goals.
The results of this poll are scarier to me than any volatility the stock market could throw our way since time and compounding are the biggest allies of young investors. With this in mind, I thought I'd spend a few minutes today breaking down some interesting tidbits that young investors should know about bull markets.
Image source: Flickr user Coffeeandmarkets.com.
1. What is a bull market?
By definition, a bull market describes any upward trend in the stock market or any tradable investment vehicle. So, for instance, you can have a bull market in metals, currencies, and even bonds, but it most often is used to describe the stock market. Although there is no concrete definition of what constitutes a bull market, the generally accepted rule is that a 20% increase (or more) from a recent low qualifies an index as being in a bull market.
2. Bull markets are common and last for a long time
There have been 34 corrections since 1950, including the latest in August. However, the other side of this coin is that there have been a nearly equal number of bull markets over the same time frame. Despite spending about 18 of the past 65 years in correction or bear market territory, the stock market has been in a bull market for approximately 47 of those years.
3. All bull markets end, but we rarely know why until after the fact
If history teaches us anything, it's that nothing lasts forever. All bull markets will eventually end -- on the bright side, so will bear markets. The economy naturally cycles up and down, and investor sentiment will typically reflect the expanding or contracting nature of the U.S. or global economy.
One thing that can never be known ahead of time is why bear or bull markets begin or end until after the fact. It's never a bad idea as an investor to understand the macroeconomic growth drivers of the economy, but the bottom line is that trying to time your investments based on macroeconomic or company-specific events will likely to turn out to be an unsuccessful investment strategy.
4. All things equal, bull markets trounce even the worst bear markets
Stocks may have just as much chance of falling as they do of rising, but make no mistake about it, bull markets have the upper hand. Not only are investors able to take advantage of substantially longer periods of rising stock prices, but there's no ceiling on stock valuations when you buy a stock.
By contrast, stocks can go no lower than $0, so there is a ceiling to your gains when taking the view of a pessimist. Even though steep market corrections of 58% between 2000 and 2002 and 57% between 2007 and 2009 might give you indigestion, the 582% gain long-term investors experienced between 1987 and 2000 would likely make you forget any previous corrections.
5. Long-term investors succeed because of bull markets
Finally, long-term investors succeed because they don't try to time their investments. A report compiled by J.P Morgan Asset Management, using data from Lipper, shows that people who stayed fully invested in the S&P 500 between Dec. 31, 1993, an Dec. 31, 2013, made a clean 483% on their investment. Keep in mind this gain includes the aforementioned plunge of 58% following the dot-com bubble in 2000 and the 57% tumble beginning in 2007 caused by the credit crisis and housing collapse.
However, if you missed just the 10 best days over that 20-year time period -- we're talking 10 days out of nearly 5,000 trading days -- your return dropped from 483% to just 191%. If you happened to miss the 40 best days, you actually saw your investment shrink by 19%!
The lesson is simple: You can only take advantage of a bull market if you remain fully invested. Resign yourself to the fact that timing the market isn't a possibility and trust in the long-term strength of the U.S. economy and stock markets. Because if you hold solid companies over a long period of time, you'll succeed.
