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To begin with, market declines are part of the investment process. Over the past century, the stock market has averaged one “correction” – or a decline of 10 percent or more – a year. Furthermore, on average the stock market has declined 20 percent or more once every three or four years. So, instead of thinking that a severe market decline is a once-in-a-lifetime disaster that “just had to happen” while you were investing, keep in mind that market declines are normal, frequent and, for the most part, short-term. And if you’re a long-term investor, these declines usually offer an opportunity to buy quality investments at a lower price.
Over the long term, quality stocks have historically outperformed quality bonds. This fact should be of particular interest to you, if you begin to wonder if you should scale back on your stock investments in favor of “safer,” more conservative vehicles. From 1926 to 2008, large stocks returned 10.4 percent per year, long-term government bonds returned 5.5 percent and corporate bonds returned 5.9 percent. if you want to give your money the potential to grow – and grow at a pace that can keep you ahead of inflation – you’ll need at least some exposure to stocks. While you certainly may want to own some bonds – you don’t want to let a “down” market discourage you from buying stocks of strong companies and holding them for the long term.
The U.S. economy has proved amazingly resilient. Since the end of World War II, each recession has averaged 10 months – and each economic expansion has averaged almost five years. Recessions often begin and end without warning, so if you take a “time out” from investing in response to a recession-induced market slump, you could end up missing the beginning of the next market rally. And when the market does turn around, your quality investments are the ones that will likely show the quickest recovery.
By owning a mix of quality investments that are suited to your risk tolerance, time horizon and long-term goals, you can develop a strategy designed weather any storm that hits the financial markets.
This column is prepared by the national office of Edward Jones and is provided by Charles Wartsbaugh,CFP®, who is a financial adviser in Victoria. Write or visit him at 303 E. Airline Road, suite #5, or call 361-578-2496.