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Don't Let Market Volatility Scare You Out of Stocks

Maybe we all can’t invest like Warren Buffett, but at least we can try to think like him. Early last week, he was asked on financial TV if he ever tries to time the market. He replied, “Stocks are going to be higher, and perhaps a lot higher, 10 years from now. I am not smart enough to pick times to get in and get out.” While this sound advice is not unfamiliar to most investors, many forget it when share prices are falling.

Some people still regard investing as gambling. If that is true, please identify the casino in which the player, not the house, wins 80% of the time. Since 1947, the S&P 500’s price return was up in 72% of calendar years. Add in dividends reinvested and that batting average jumped to 80%.

What’s more, the S&P 500’s rolling 10-year compound annual total return reached as high as 21% in Q2 1959, and 19% in Q3 2000, to as low as 0.5% in Q3 1974 and -3% in Q1 2009, with a median of 11.7%. Turning that into a cumulative total return, the S&P 500 rose an average of slightly more than 200% during each 10-year period.

Rolling 10-Year Total Return CAGRs

From a sector perspective, Warren’s advice also rings true. Since 2000, a 15-year period that includes two mega-meltdown bear markets and one 24-month rate-tightening cycle, all 10 sectors in the S&P 500 recorded positive median 10-year CAGRs, from +12.6% for energy to +3.8% for telecom services. In fact, nine of 10 sectors posted median CAGRs of +7.5% or higher, while the S&P 500’s was +8.1%.

So there you have it. If you are thinking about bailing out of stocks because of the currently high wall of worry, heed wisdom from Warren and look to history for hand-holding. Both will tell you that when considering the market in general, or sectors in particular, take a long-term view. Just as President Reagan was dubbed “The Great Communicator,” so too a 10-year holding period could be regarded as “The Great Neutralizer” of volatility, thereby discouraging you from becoming your portfolio’s worst enemy by trying to time the market.

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