Investor Confidence Quiz Transcript (3:47)
Hi I'm Terry Herr, Managing Partner at Herr Capital Management. Thanks for joining us today on the prosperity blog cast. Today we're going to talk about whether or not you're a confident investor.
So are you?
Understanding Historical Ups and Downs of the Stock Market
With the coronavirus social unrest and the election coming up, it's more important to understand historical ups and downs in the markets and what that means for your future. Patrick Moynihan once said “Everyone is entitled to their own opinion but not their own facts and when it comes to the investing. Facts better be informing your decisions, not your feelings.”
But before we look at the market history, let's ask Two questions:
1) What's the most desirable outcome for an investor?
2) What is the most likely outcome for investors?
So we'll answer the first question: The most desirable outcome is positive returns. We'll get to the most likely outcome, but let's first look at what a big loss in the market is, small losses, small gains, big gains and how often they take place. So we'll define a big loss of negative 12% or greater, a small loss of somewhere between 0% to a negative -11.9%. We'll define small gains as 0% to 11.9% percent positive returns and a big gain anything of 12% or greater.
So let's now look at the stock market history from 1925 to 2018 - This is the 93 years. We'll look at the calendar years and how many times do you think the stock market had a big loss? Seven times - Seven of those calendar years we had a big loss, more than 12% or more. Small losses? 18 of the 93 years we had a small loss between 0% and -11%. Small gains? A little bit better: 20 years we had small gains of 0% to a positive 11.9%. In 48 years, we had Big gains of 12% or more.
So what does that mean? It means that 51% of the time the stock market was in or experienced positive large gains of 12% or more, 21.5% of the time we had small gains but only 7.5% of the time did we have negative big losses. So we did really well. The stock market history is on your side.
So let's go back to those two questions,
1) The most desirable outcome for investors - Positive gains;
2) The most likely outcome for investors - Positive gains.
Keeping an Investor's Emotions in Check
What's most important is that you don't let your emotions impact your decisions and that you make a long-term discipline plan so that you can ride the markets up and down. The biggest challenge is, we just don't know when those negative years are coming. So it's important to be disciplined and that's what we do here at Herr Capital Management.