- 12th Nov 2015
Long term lessons from the stock market
It is a commonly known fact that investing carries risk. And in exchange for accepting the risk that your investments might lose money, they have the potential to go up in value too. That’s the trade-off. Rises and falls are an inherent part of stock market investing. How much your portfolio goes up and down will depend on how it’s invested – how diversified it is, for example, and how much risk you’re taking across the portfolio.
Stock markets can go up or down for a variety of reasons. They’re unpredictable in their nature. And while we can make assumptions and draw conclusions about what’s going to happen (or why something has just happened), to accurately and consistently predict stock market performance would unfortunately require a crystal ball. But if it didn’t, there would be no risk – and the stock market wouldn’t function at all.
So, if history shows we can’t predict what’s going to happen to the stock market tomorrow, or even the next day, is there anything we can say?
Well, yes. There is a clear long term trend to the historic performance the stock market. And that trend is upwards. And while it’s a broad statement, it is an important one.
Throughout history there have been events that have triggered adverse market reactions; The Great Depression, the Dotcom bubble and the 2007 financial crisis, for example. And while we don’t know for how long a market might fall, history shows us that time can heal.
The longer you keep money invested, the more chance you have of riding out any volatility or negative market movements. We can’t say how long a fall may last or how long a recovery might take. It’s for this reason that investing should only be considered as a long term strategy; 3-5 years is an accepted minimum, but the longer the better.
Looking at your portfolio when the markets are down is never going to be an enjoyable read. This goes hand in hand with investing being a long term strategy. If you don’t need the funds for the next 20 years then looking at your account each week won’t make much sense. Especially if your account is showing a loss. Losses stir emotions and emotional investing is never a good strategy.
Accepting risk and volatility, along with appreciating the long term nature of investing in the stock market, is the key to investing successfully. Short term, knee jerk investing is often just speculation and should never be the driver of important investment decisions.
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Any news and/or views expressed within this article are intended as general information only and should not be viewed as a form of personal recommendation. This article is not directed to, or intended for distribution or use in, any jurisdiction where such distribution would be prohibited. To the extent permitted by law, Wealth Horizon accepts no duty of care or liability for loss occasioned to any person acting or refraining from acting as a result of any material contained within this article. Where past performance is shown, this should not be taken as a guide to future returns. Investment in the stock market is not a suitable place for short term money. The value of investments and associated income may go down as well as up and you may not get back the full amount invested.