Part 1: Stay or leave?
Trying to accurately predict a market correction successfully is virtually impossible. As the legendary former mutual fund manager Peter Lynch said: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves.”
In the 92 years since 1926 and up to December 31, 2017, the US S&P500 has produced 24 negative years and 68 positive years. In other words, the S&P500 has been producing positive returns for 74 per cent of the time and negative returns for only 26 per cent of the time. And if we restrict the count of negative years to those episodes of 10 per cent or great declines, they amount to just 13. That’s just 14 per cent of all periods or one in seven years.
More recently – taking a more typical investment horizon – the 38 years since 1980 has seen ‘intra-year’ declines of between 3 per cent and 49 per cent every year. Declines are simply part and parcel of investing and once again, the market has produced a positive return in 29 of those 38 years.
We’ve demonstrated that ‘time in’ the market is clearly important but let me first remind you that if you are investing for the long-term, you must stick to ‘quality.’ By quality, I mean quite simply, in companies that have the ability to generate high returns on their incremental equity.
Tomorrow we will continue this conversation.
Here is the link to Part 2 of this article.