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The Long Term

Fear of a market collapse may be the single greatest fear new or potential investors have. Nobody likes to put money into stocks or mutual funds and lose money shortly thereafter.

But over the last 40 years, assuming that people who experienced such disappointment were following a prudent, long term investment program and did not sell in panic, they did not lose money even if they bought near market highs and sold near market lows. In the charts below, you can see what ultimately happened to an investment portfolio that tracked the performance of the Standard & Poor's 500-stock index in a number of difficult investment periods. The S&P index is generally considered to be representative of the stock market as a whole and serves as a benchmark against which stock portfolio performance is measured.

The first chart assumes that you bought at a peak just before the market collapsed and sold either (1) just before the market started to recover or (2) held on until the market was near its lowest point during the 1990 recession.

If you bought near the market high in: And sold quickly near the market low in: Your total return was: But if you held longer and sold near the 1990 market low your total return would have been: And your average annual return would have been:
19771978- 9.7%+443.1%+13.1%
19841984- 6.3%+135.3%+13.0%

Each of these scenarios represents a poorly timed investment decision. Even then, everyone except the person who purchased in 1987 earned a nice profit, and even the person who bought just before the 1987 crash still recovered any losses.

Here's another, slightly different, situation in which investors bought near market highs in several different years and sold at a period of weak but not terrible performance.

If you bought near the market high in: And sold near the 1995 low (a respectable, but still not peak time, your return was: And your average annual return was:
1966+1,462.6% +10.0%
1968+1,102.6% +10.0%
1973 +930.3% +11.6%
1984+313.6% +12.5%
1987+80.2% +8.3%

If these investors had held on until the end of 1997, their portfolios would have been significantly larger, but even selling when they did, they managed to earn respectable returns. This is the case even for the unfortunate investor who went into the market just before the 1987 crash.

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