Owning Stocks Is Not As Easy As It Looks
One recent summer afternoon, my friends and I met at the BMW Performance Driving School in Spartanburg, SC to test our mettle behind the wheel of some of the most beautiful, powerful sports cars available. Needless to say it was exhilarating and quite a rush, not to mention a bit scary, and humbling. We ended the day as passengers with a professional driver, holding our breath, as they made cornering turns at high speeds look easy.
For most of the past two years, investing in the stock market may have seemed a bit easy also. Low interest rates, a recovering economy, and an accommodative monetary policy have all been a tailwind for stocks. Coupled with bank money market rates near zero and most government bonds yielding under 2%, stocks were one of the few places to grow money. With this backdrop, the stock market continued to climb higher, breaking record after record high. In this kind of environment, it can almost seem as if investing in stocks is low risk. After all, the stock markets almost always seem to bounce back, right?
The reality is, stocks have had a historically high level of volatility and variability of returns. For example, the S&P 500 index which represents a large part of the US stock market, has averaged a return of 14.8% per year over the past ten years, however, the variability of that average return is plus or minus 13% 1. So although the average annual returns of the S&P 500 index has been positive over the past ten years, there have been several times where the index, along with other global stock indices, have moved significantly down over different periods. Additionally, we have no way of predicting what returns will be in the next ten years.
This variability and uncertainty doesn’t mean we shouldn’t own stocks. Most likely, we’ll all need to have some proportion of stocks in our portfolios to maintain growth as part of our long-term financial plan. Like stepping into a high-end sports car, owning stocks can be an exciting powerful tool to meet our goals, but we should be careful not to get over-confident or complacent. Stocks don’t always go up, and not respecting their risks, can be a dangerous game.
As part of our financial planning process, we assess your investment allocations and use a sophisticated modeling software to help determine the optimal amount of stocks you should own.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please consult the appropriate professionals for specific information regarding your individual situation prior to making any financial decision.All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy assures success or protects against loss.
1 Historical returns 2012-2021 from Yahoo.com