“Historically, the stock market has doubled on average every 10 to 12 years.” – Ron Baron
Staying invested in equities over the long term increases the likelihood of positive long term returns, says Ron Baron. Historically, the economy has grown on average 2%-6% nominally per year, or doubling every 10 or 12 years, and the stock markets have closely reflected that growth.
Effectively, as GDP has grown, so has the stock market.
U.S. GDP in 1968 was $951 billion, 55 years later it is $27.6 trillion. That’s over 29 times greater than it was in 1968.
The Dow Jones Industrial Average was around 936 and the S&P 500 was 103 in 1968. They are now 33, 507 and 4,288, respectively.
An investor in a product that tracks the S&P 500 Index would have had a 69% chance of generating a positive return during any given quarter between 1926 and 2023.
Increasing the investment horizon to 10 years would have resulted in a 95% chance of a positive return. And investing over any 20-year or 30-year period would have produced positive returns 100% of the time.
Long-Term Investors Have Had Better Chances of Positive Returns
An investor in a product that tracks the S&P 500 Index would have had a 69% chance of generating a positive return during any given quarter between 1926 and 2023.
Increasing the investment horizon to 10 years would have resulted in a 95% chance of a positive return. And investing over any 20-year or 30-year period would have produced positive returns 100% of the time.
A Few Missed Days May Be Costly
Since we cannot predict when economic and market cycles start or end, there is no good time to time the market.
Over the past five market cycles, missing the best five days would have resulted in a 38% lower value of a hypothetical $10,000 investment, and missing the best 10 days would have resulted in a 55.3% lower value.
As big down days are often closely followed by big up days, those who panic and sell on the down days are likely to miss out on the ensuing up days.
“Compounding [interest] is the most powerful force in the universe” – Albert Einstein
The purchasing power of the dollar has fallen about 50% every 17 years over the past 55 years. While inflation causes currencies to lose value over time, it has a positive impact on tangible assets, businesses, and economic growth.
Inflation causes currencies to lose value over time. However, it has a positive impact on tangible assets, businesses, and economic growth. This means stocks are the best hedge against the devaluation of your money.
While the simple answer to combat inflation is to invest your money over the long term, the concept of compounding tells us why. When your savings earn returns (e.g., bank interest, dividends), compounding allows these returns to earn even more returns.
Over time, this effect snowballs, and earnings grow at an increasingly fast rate. Given a small initial investment, in year one the amount you earn on your investments will not be a lot. However, in year 10…or 20…or 30… you will not believe the impact of the “power of compounding.
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