Investors are concerned today as the market corrects, the trade war threatens to be long term, the Trump tax cut effects are wearing off, and earnings are taking a hit. But, one needs to put things in perspective when looking at long term investing. When making investment decisions, ask yourself how much will your investments be worth in one, five, and ten years.
Stock Market Investment Perspective
The New York Times has an interesting article in this respect. Despite recent losses, stocks are riding high when you look at the longer term.
Lately, the markets have been rattled about the prospect that a protracted trade war with China could begin to take an economic toll at a time when global growth is slowing.
Viewed over a longer period, however, corrections often begin to look less severe.
Even after the current sell-off, for instance, the S&P 500 through the end of last week was up more than 16 percent since President Trump’s inauguration and more than 23 percent higher since Election Day 2016.
And, if you look at the market since the depths of the financial crisis, the S&P 500 is up three hundred percent. The Times article gives us a bit of perspective.
Despite the recent losses, stocks as measured by the S&P 500 are still up handsomely since Trump’s election or since his inauguration. But, for long term investors the better comparison is this graph.
For anyone who invested in the market or stayed in the market in 2009, the chances are that they have experienced a 300% increase in value of their portfolio and the losses since the market’s peak amount to about a fifteenth of that!
Long Term Investing
Early last year we asked just how many years are required to make an investment long term. The answer was a least five years and ten is better. The value of the long term approach is that market timing is less important. You can certainly buy after you are certain that a big correction or crash has bottomed out but you do not have to be so worried about anticipating a correction, provided that you use the intrinsic stock value approach in your investment selections.
As Benjamin Graham taught us back in the 1930s and going forward, stocks are subject to mean reversion. This means that the current stock price may be higher or lower than the fundamental value of the company. But, over time in an efficient market the market price of a stock will trend towards the intrinsic value of the stock. Successful long term investments are those where you can safely estimate how much your investments will be worth in one, five, and ten years based on assessment of forward looking earnings and intrinsic stock value.
Should You Sell Your Stocks Based on the Risk of a Major Correction?
Despite all of the good investing advice that is available, the major drivers of the market are almost always greed and fear. It is certainly smart to invest and make money when you believe that the market or a given investment will be going up. And it is certainly wise to get out when things look bad. But, in both cases you may be making a mistake unless you have some sound basis aside from greed or fear. This is where the intrinsic value concept comes in. This indicator of stock value will tell you if the company will be making money into the distant future and thus will tell you whether or not to expect the stock price to go up over the next year, five years, or ten years. The market may get really enthusiastic or it may become fearful but a dispassionate appraisal of forward looking earnings will be your best guide to investment value over the coming years.