Unlike 2017, which turned into one of the calmest and steadiest uptrends for optimistic investors in a long time, this year has been anything but calm.
In late January and early February, the stock market underwent a quick, but violent, stock market correction. The iconic Dow Jones Industrial Average logged four of its nine biggest single-day point declines in its 122-year history, including a 1,175-point shellacking on Feb. 5. During that swift decline, the Volatility Index briefly climbed to its highest level since the Great Recession.
Though the stock market has since rebounded from its February lows, jitters nonetheless remain. There are concerns about heightened trade-war tensions between the U.S. and China, and more recently worries have grown over Turkey's plunging currency, the lira, and the threat of a global contagion similar to the depreciation of the Thai baht back in 1997. No matter where you look, and no matter how good or bad the stock market is performing, there's always a downside catalyst that has the potential to swoop in and pull the rug out from underneath investors.
Here's why being a long-term investor is smart
But truth be told, select data unequivocally demonstrates that investors who buy into the stock market for extended periods of time and hold onto their investments are in much better shape than those who may try to time their buying and selling activity over short periods of time. Here are three concrete data points that show why you're smart to be a long-term investor.
1. The U.S. economy spends far more time expanding than contracting
To begin with, investors should understand that the U.S. economy expands for considerably longer periods of time than it contracts. And if the economy is growing, there's a decent chance that high-quality businesses playing an integral role in that growth are seeing expansion in their top and bottom lines.
Right now, the U.S. economy is in the midst of its second-longest economic expansion since World War II ended, at 109 months (and counting). Should the economy continue to gain steam through July 2019, it would supplant the 120-month expansion leading up to the dot-com bubble as the longest.
Since October 1945, the month after World War II ended, there have 873 months. Just 122 of those months, or a tad over 10 years, have been spent in contraction or recession. This means that 86% of the time the U.S. economy, as measured by gross domestic product, has expanded over what's nearly 73 years. That doesn't leave pessimists with much of a buffer to make money, and certainly puts the ball into the court of buy-and-hold investors.
2. Bear markets and corrections may be swift, but they always get erased by bull market rallies
Though downside in the stock market is often swift and ruled by emotion, buy-and-hold investors always seem to have the last laugh.
According to stock market analytics firm Yardeni Research, there have been 36 corrections in the S&P 500 (SNPINDEX:^GSPC) since 1950 totaling at least 10%. That's about one correction every two years, which means they occur with regularity.
However, excluding our latest correction due to its recency, each and every other correction, whether it be of the 10% variety, or the 57% decline associated with the Great Recession, was eventually erased in its entirety by a bull market rally. While there are no guarantees when it comes to investing, a bull market rally erasing a correction or bear market is as close to a certainty as you're ever going to get (35 for 35, historically).
Plus, data shows that corrections typically play out over a very short period of time. Of these 36 corrections in the S&P 500, 22 had found their lows within 104 calendar days.
3. The data doesn't lie
And should the previous data points still not be enough to convince you, an analysis released by analysts at J.P. Morgan Asset Management in 2016 should do the trick.
The report, "Staying Invested During Volatile Markets," examined the S&P 500 between Jan. 3, 1995 and Dec. 31, 2014. Mind you, this period includes the 49% peak-to-trough tumble associated with the bursting of the dot-com bubble, and the 57% plunge during the Great Recession. What it showed was that an individual who'd bought into the S&P 500 at the beginning of this 20-year period and held throughout would have netted a 555% return, or 9.9% annually. Considering that inflation has historically averaged in the neighborhood of 3%, any long-term investor during this period would have made some real money.
Now, assuming this individual missed only the 10 best single-day performances over this 20-year period, their return would have been slashed to just 191%. Miss just over 30 of the best days, and all 555% would be gone.
The point is this: Timing the market is a complete crapshoot, and the data proves it. Folks who stick around for long periods of time and buy high-quality businesses tend to outperform.
Long story short, if you're a long-term investor, feel free to give yourself a well-deserved pat on the back.