The Stock Market – It’s Similar to Ripples in Water

Key Takeaways

  • The stock market’s movements can be compared to ripples in water when you drop a pebble in: big at first, but evening out over time.
  • Looking at 20-year cycles, versus performance over one year, can provide a better perspective of the stock market.
  • A blended 50/50 portfolio of stocks and bonds can help keep you in the market in the long term.

 

Have you ever observed a rock or a pebble being thrown into a pond? At first, the waves that result are fairly large, but eventually, they subside and the water flattens out. The stock market shares some similarities, in that it can have a really big wave, either up or down – but over time, it evens out.

This particular chart, showing 20-year cycles going back to 1950, demonstrates these waves and the subsequent evening out:

Take a look at the far left section, showing one year. The first year shows stocks at -39% in one year and +47% in another year. Bonds are -8% and +43% in total returns. A 50/50 portfolio, which tends to be what most people have, is at -15% and +33%.

Now go to the far right of the chart and look at the 20-year rolling section. Here you’ll see much smaller ripples – stocks range from +6% to +17%. A 50/50 portfolio is +5% to +14%. If you only look at these numbers, you may be tempted to stick with stocks alone. However, look back at that first year. That volatility scares a lot of people and they jump at the wrong time, selling when they shouldn’t.

This is why a blended portfolio, closer to that 50/50 mix, with returns that aren’t that far off from the 100% stocks scenario, keeps people in the market for the long term. This balance helps you make it through those bad waves that happen from time to time – your eggs aren’t all in one basket, so to speak.

So when you’re saving for retirement, keep these 20-year cycles in mind. Don’t think about that first year. You’ll get a decent rate of return if these historical trends hold up over time. Until next time, enjoy.

Gary

Gary has provided wealth management services to clients for over 30 years. He is credentialed in financial services with practical experience in all areas of finances and money. He is the author of Changing the Conversation, Wealth of Everything, and co-author of The Business Battlefield.

He is genuinely interested in getting to know the person in front of him. Who are they? What’s most important to them? Where do they want to go in life? Whether he’s advising clients, mentoring his team, or coaching entrepreneurs, Gary is always simplifying complexity and motivating others to take the next action that’s right for them.

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