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This chart shows the secret to never losing money on the stock market

The graph is based on data collected by Yale economics professor Robert Shiller. It is obvious that “there are decades better than others,” he told Money in an interview. While the market can be volatile and succumb to occasional bear markets, investors tend to underestimate the value of time, he adds. “The long story is pretty good for the stock market.”

This long-term advantage of stocks over other assets (like bonds) is not a new concept, as Shiller points out. Jeremy Siegel, professor of finance at Wharton, wrote the 1994 classic, Long-term actions, while Charles Amos Dice, professor of business organization, broached the subject in the 1920s with his book, The stock market.

If none of this is new, then why do so many well-meaning investors continue to lose money on the stock market? The answer often comes down to a lack of patience.

Adopt a long-term mindset …

Charts like the ones above are a useful tool for Dean Catino when discussing the importance of a long term investment strategy with clients. To begin with, Catino will describe the S&P 500’s chances of making money in the S&P 500 on a daily basis – just over 50%, or as a coin toss, notes the president of Monument Wealth Management, an advisor. registered independent investment. Then he will look at longer periods and improved chances of making money.

Here’s a breakdown of annualized total returns over different time periods, according to data analyzed by The Measure of a Plan:

  • 1 year: From -37% to 53.2%
  • 5 years: From -11.7% to 28.5%
  • 10 years: From -4.1% to 17.6%
  • 20 years: From 0.5% to 13.2%

While 20 years has been the tipping point for a range of positive returns, many investors quickly appreciate the value of staying invested even for a period of 10 years, when the probability of making money is 94%, says Catino on conversations with his clients. The problem? Long-term charts do not show the declines that occur in a calendar year, which on average exceed 13%, he adds.

It is these short-term bouts of volatility that can shake up investors with a long-term mindset, Catino notes. “If you want to invest in the stock market, you have to give it time. “

And yet, the hardest thing for many investors to do is just this: give the market time to recover from one of its inevitable tough times, says Catino. Because even a rational person can make irrational decisions during a stressful time, he adds.

“Having faith in a plan and a process, and knowing that the markets are coming back really well over a long period of time is so important,” notes Catino. “You have to have a plan; having a medium plan is better than having no plan at all.

… in a short-term world

There can be two truths to investing, however: the market is attractive as a long-term investment, and less attractive in the short term. And appreciating a proven track record in stocks doesn’t mean giving up on caution.

The S&P 500 has jumped more than 80% from its March 2020 low, and Shiller’s valuation measure for this index – the CAPE ratio, short for cyclically adjusted price / earnings ratio – is the highest since 2001, or “quite high,” he notes. In fact, Shiller says, “I’m a little scared of another accident, actually.

What does this mean for investors? Keep investing in the stock market, advises Shiller, just recognize that huge gains and high stock prices mean it’s always – as always – a risky proposition in the short term.

“I don’t think it’s a particularly scary time, but you could be careful,” Shiller says. Some investors may consider reducing their portfolio’s exposure to equities and taking a less aggressive approach to investing for now, he adds.

The problem of predicting where the stock market is heading requires predicting what will happen politically, Shiller notes. These types of unknowns create the ever-present prospect of volatility that investors must find a way to manage over time, adds Catino.

“What people want is a panacea, and it doesn’t exist on the market,” says Catino. “There is a risk, and that is why there is a return.”

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