Investing for the long term
No one can predict what will happen in the financial markets in the next day or over a few months. But we do know that if the economy grows, the financial markets eventually will reflect that. Over one or two years the stock market can be down steeply but over much longer periods a properly balanced portfolio yields positive returns.
2008 was the worst year for the stock market since the 1930s reflecting what Alan Greenspan called a "once in a half century, probably once in a century type of event."
During the worst period in American history, the Great Depression, stock prices plummeted for five years before rallying but government bond prices rose, cushioning the loss in balanced portfolios. In more benign periods, even calendar year losses are rare.
In the last thirty years, a minimally balanced portfolio of 60 percent stocks and 40 percent bonds would have had a negative year only once a decade and the worst of these years was down only seven percent. Over the last eight decades, this portfolio would have compounded at more than 9 percent a year, yielding many multiples of the initial investment.
Participating fully in these returns by harnessing the markets and not trying to outsmart them, keeping costs low, and letting the power of compounding do its work, is a strategy for success.
The following chart illustrates that over the past 80 years, equity investments sometimes lose value over short time periods, but long term investors have been rewarded for their patience. However, past performance is not indicative of future returns.
Source: Dimensional Fund Advisors
60% Fama/French Total US Market Index Portfolio
40% Five-Year US Treasury Notes