When advising for investing strategies, one of the most frequent questions that I am asked by friends and family is,” What if there is a recession in the next two years? What if the stock price goes down next month or next year? What if a company goes bankrupt?” I have answered all of these questions in a similar way. I would like to share them with you all, in case you have the same questions.
And the answer is, Invest for at least 5 years!
If we look at the past performance of the S&P 500 from 1928-2014, the most widely followed benchmark for the market performance, the 5- year moving average was 11.50%, the 10-year moving average was 11.88% and the 20-year moving average was 12.59% based on the data taken from Aswath Damodaran’s website (http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html).
A 5-year moving average means the average price of the S&P 500 for 5 years starting from 1928 (average of 1928-1932, average 1929-1933, and so on). This is similarly the case for the 10-year moving average and 20-year moving average.
This means that if an investor holds an investment in the market index for a given 5 year period, there is a 99% probability that the average annual return on the portfolio is going to be between 8.9%- 14.12%, for 10 years it is 10.13%-13.62%, and for 20 years it is 11.5%-13.69%.
Investors should not worry about short term fluctuations in the market and should not panic for a company going bankrupt. Do not put all your eggs in one basket! They should invest on a frequent basis i.e. monthly/quarterly/semi-annually and diversify their portfolios. Invest in different sectors so as to minimize risk of losing all of your money. Although, it is expensive to invest in many stocks, a new broker-dealer www.MotifInvesting.com may prove to be helpful. It allows you to invest in up to 30 stocks at a transaction cost of $10.
*Analysis based on the data from Aswath Damodaran’s website.