Many potential investors view the stock market as a giant casino. But, over the long term, nothing could be further from the truth. Historically, the odds of making money in the U.S. stock market are:
50% in 1-day periods
68% in 1-year periods
88% in 10-year periods
100% in 20-year periods
A share of stock is a fractional interest in a business and over the long term you can be sure of one thing: share prices follow earnings. Look back through history and you will not find even a single company that increased its earnings quarter after quarter, year after year, and the stock didn’t tag along or try to find one stock whose earnings declined year after year and the stock continued to move up. It just doesn’t happen. Regardless of what the market does next week or next month, you can count on it to reflect corporate profits over the long term.
When results are measured not in months or years but decades, nothing has rewarded investors better than common stocks. They are the greatest wealth creator of all time. $1 invested in common stocks with dividends reinvested then, would have been worth about $30 million today.
Pick whatever starting date you want over the past two centuries and you’ll find that the investment returns for different asset classes are remarkably consistent. Stocks are the big winner. Since 1926, the stock market has generated a positive return in 70 out of 95 years.
This does not mean that stocks can’t suddenly sell off or even enter a bear market. That’s always a possibility, one you should prepare for in advance with diversification outside of equities and trailing stops behind your individual stock positions. But a diversified portfolio of stocks has been the best investment choice for well over 200 years. And it is likely to remain so for the foreseeable future.
Sven Franssen