Way back in the day, when I used to trade for a living, I probably placed nine bets that a stock or index would go down in the near future for every time I placed a short-term bet on up. It is just my natural bias.
Some people look at a chart or a news story and their brain reaches for why this should go up. Mine goes instantly to why it will go down.
But as an investor, and someone who teaches others to invest, I believe you CANNOT make money betting AGAINST the U.S. stock market.
The data is overwhelmingly convincing on this point. Since 1926, the U.S. Stock Market has averaged 10.4% per year (Ibbotson). Bonds, in general, have averaged 5.4% over the same time period, while U.S Treasuries have barely outpaced inflation at 3.7%. Inflation is running at 3% a year. Again, these are all averages.
No one would argue that stocks do not carry risk in the short term. That is why, as a trader, with a four hour time horizon, I used to bet on stocks going down all the time - and win (sometimes).
Even over longer time horizons, stocks will go down. Looking back over time, it is reasonable to expect a losing year every couple years. More frustrating, even when markets in general are going up, individual stocks of perfectly good companies will go down, often for no apparent reason.
Take yesterday for example. The market went up 117 points. 2,110 stocks on the New York Stock Exchange went up and 1,188 went down. 164 stocks made new 52 week highs. An even greater number, 203, made new 52 week lows.
But that is the short run. Let's look at the long-run.
Over any given five-year period, stocks have lost money just 10% of the time. Stocks have beaten the return of bonds and cash equivalents in about 80% of all rolling five-year periods. And stocks have beaten bonds and cash in all rolling 20-year periods since 1926.
To borrow from Nick Murray:
"There are really only a few things we can know about the market. Fortunately, they're the only things we ever need to know. (1) It will continue to reflect the growth of the leading companies in the world's most innovative, most flexible, most transparent economy. (2) Because of its inherently higher volatility, it will always provide significantly higher returns than do less volatile asset classes like bonds. (3) No matter what the market is doing today, nor what you fear it may be doing tomorrow, ten years from today you will wish you had invested in it every dollar you could have laid your hands on."
1. Nick Murray. "It Goes To Show You Never Can Tell," Financial Advisor, November 2007; p45, 46, 175 <No on-line version available>
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