Why perseverance is important in investing

Suppose you had invested throughout 2021 in the US stock market. That would have been nice! Indeed, the S&P500, the main US stock index, often used as an indicator of how the market is doing, ended that year almost 27 per cent higher.

Of course, investing doesn't always go this way. While the past says nothing about how things will go in the future, we do know two things pretty much for sure: 1) that at some point you will face a stock market crash, and 2) this doesn't mean that you should immediately withdraw your money.

Why we should stay the course when investing

History shows that stock prices rise over the long term, just not in one straight line. If you look at the S&P500 index over the past 58 years, you will see that the price has risen sharply over this long term. At the same time, you see that in the short term, prices can fluctuate considerably. In other words, the economy is growing in the long term, but in the short term you can be sure that you will face bigger and smaller dips.

Dips of around 5 per cent in the minus occur just about every year, and often recover as the market generally grows. Larger ‘corrections’ of between 10 and 20 per cent happen less often.

How long do market corrections last?

Usually not that long. If we look at the S&P500 again, the average correction historically lasts about four months, and the market falls 13% on average. And then you have the real stock market crises, also called bear markets, where the stock market falls 20% or more in a given period.

From 1903 to 2016, there were 11 bear markets, which lasted 1.5 years on average, with prices falling 35% on average. So this happens on average about once every 10 years. The credit crunch is a recent example of this. If you had started investing on 1 January 2008, you would have had to wait until 2012 for your losses to fully recover. Had you left your money, and reinvested your dividends, your investments would have grown by about 137% by the end of 2017.

Losses are in your own hands

In short, perseverance pays off when investing! Don't panic if things take a turn for the worse. If the stock market takes a downwards turn for a few days or even months, and you might get a bit anxious. But always remember that you only stand to lose value when you withdraw your money.

Know that investing takes risk and you may lose (part of) your investment. And remember that past results are no guarantee for the future.