No Pain, No Gain: The Long-Term Case

11/17/2014 9:00 am EST

Focus: STRATEGIES

Charles Carlson

Editor, DRIP Investor

"I don’t want to lose money" is one of those phrases that sounds perfectly reasonable, asserts Chuck Carlson, editor of DRIP Investor.

But anyone who has invested in the stock market knows that stocks go down occasionally. Yes, the long-term glide path is higher, but you will have to endure periodic sidesteps and retreats along the way.

The good news is that if you lengthen your investment time horizon, the chances increase that you will not lose money in the stock market. Consider the following statistics:

  • According to Ibbotson Associates, large-company stocks have suffered only 24 losing years since 1926. Said differently, on average, large-cap stocks have provided a positive total return in nearly three out of every four years since 1926.
  • If you extend the holding period to five years, the number of losing periods diminishes sharply. Indeed, there have been 84 rolling five-year periods since 1926. In only 12 of those five-year rolling periods would investors have lost money in large-cap stocks.
  • By extending your holding period to ten years, your chances of losing money decrease even further. Since 1926, there have been 79 rolling 10-year periods. Investors in large-cap stocks lost money in only four of those 79 rolling 10-year periods.
  • Finally, there has never been a 20-year period in the stock market (and there have been 69 rolling 20-year periods since 1926) when large-cap stocks posted a decline.

I know some of you are saying, well, what about small-cap stocks? Aren’t they a lot riskier for investors? Again, if you lengthen your investment time horizon, the numbers are just as compelling:

  • Small company stocks, as a group, lost money in only 27 out of the 88 years since 1926. That’s a success rate nearly as high as large-cap stocks.
  • For rolling five-year periods, small company stocks have declined 12 out of 84 periods: the same as large-cap stocks.
  • For rolling 10-year periods, small company stocks have lost value in only two periods: a better record than large-cap stocks.
  • Finally, like large company stocks, small company stocks have never suffered a decline in the 69 rolling 20-year periods since 1926.

So you see, if you approach investing with a long-term time frame, your chances are pretty good that you won’t lose money. To be sure, you will have to endure some short-term losses to capture those long-term gains.

But that is simply the cost of doing business in the stock market—periodic short-term pain—to reap outstanding long-term gains.

Bottom line: Don’t be afraid to lose money from time to time in the stock market. If you don’t panic and keep your eye on the long-term, you should win handsomely in the end.

I remember sitting in my office on October 19, 1987 and seeing the Dow decline 22.6% in a single day. I weathered the bubble bursting in Internet and technology stocks in the early 2000s. I saw my investments lose a lot of money in the 2008-2009 bear market.

But in every instance, the market recouped those losses and headed much higher, taking my portfolio value to new heights. The stock market is still the best place in the world for anyone to build wealth.

But you have to get in and stay in the game. Avoiding the stock market because you don’t want to lose money is the biggest mistake you could make with your money.

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