Following what seemed like one of the least volatile years in recent history, the stock market has been anything but calm in 2018. Beginning in late January, it took just 13 calendar days for the nearly 122-year-old Dow Jones Industrial Average (^DJI -0.51%) and S&P 500 (^GSPC -0.08%) to tumble more than 10% from their Jan. 26, 2018 record-closing highs. After more than two years, investors were looking at a genuine stock market correction.
Stock market corrections, though common, are a source of fear
Of course, corrections themselves aren't uncommon. Market analytics firm Yardeni Research offers detailed analyses of corrections and bear markets (drops of 20% or more from a recent high) dating all the way back to 1929. Since 1950, there have been 36 separate instances where the broad-based S&P 500 has tumbled by a minimum of 10% -- i.e., official correction territory -- suggesting that, on average, a correction occurs about once every two years. Nevertheless, a regular dose of corrections hasn't seemed to lessen the panic that hits retail investors when they strike.
Image source: Getty Images.
Over the past two-plus months, we've witnessed veritable doomsday headlines from various news outlets every time the iconic Dow seemingly drops more than a few hundred points.
- "Dow plunges 724 points as trade war fears rock Wall Street" -- CNN Money, March 22, 2018
- "The Stock Market Is Crashing. Here's What You Should Do" -- Time, Feb. 5, 2018
- "Stocks Collapse: Dow Suffers Worst One-Day Point Drop Ever" -- RTT News, Feb. 5, 2018
- "Carl Icahn Warns Volatile Stock Market Will 'Implode' One Day" -- Fortune, Feb. 6, 2018
If I read these headlines, I wouldn't want to get out of bed or invest in the stock market, either. And that's a growing concern.
According to an October survey from Ally Financial, 61% of the more than 2,000 adults surveyed viewed the stock market as "scary or intimidating." A separate survey from Bankrate in July 2017 found that only 13% of millennials would consider putting their money to work in the stock market, with 30% preferring cash, and 17% leaning toward gold over the stock market.
Behold the power of long-term investing
Yet, we know from historical data that the stock market offers the best chance of wealth creation over the long run. That wealth creation will, however, come with some bumps in the road. If you're still skeptical about the power of long-term investing, here's some data that just might change your mind.
Data source: Wikipedia. Table by author. Total annual return includes dividends. Color coding in annualized return column denotes strength of five-year returns.
Above is a table outlining the annual returns in the S&P 500, inclusive of dividends, since 1970. Also listed is the trailing-five-year annualized return rate for each year, beginning in 1974.
What stands out? How about the fact that out of 44 years of five-year annualized returns, just seven of those years had a negative trailing average. Further, of those seven years, the annualized negative return ranged between just minus 0.21% and minus 2.35%. Even though investors lost money over these five-year stretches, the annualized loss rate was truly minimal.
Now compare that to the 37 years where the annualized five-year return was positive. In 27 of 37 years, the five-year annualized return rate was more than 10.7%. In fact, the median annualized five-year return rate over this 44-year-period is a mind-blowing 14%, inclusive of dividends. That'd lead to an average doubling of your money in less than six years, assuming the averages held up.
Image source: Getty Images.
What's this all mean?
Now that you've been bombarded with data, you're probably wondering what the main takeaway is. Put simply, if you buy high-quality stocks in regular intervals (once a week, month, or quarter, for example), history shows you should come out ahead over the long run.
Look, there's no way to know in advance when a correction or bear market is going to strike, how much the indexes will drop, or how long a correction or bear market will take to resolve. But what we do know is that every single correction in history, save for our current correction, has been eventually erased by a bull market rally, often within a matter of weeks or months. Though nothing is a given when it comes to investing, we're talking about an event -- erasing corrections with a bull market rally -- that has had a 100% historic success rate. That's as close to a guarantee as you're going to get in the stock market, but it only works if you commit to your holdings for the long term.
In other words, aim for the horizon and stop sweating what happens until you get there.
