Latest news with #historicaldata
The National
01-07-2025
- Business
- The National
How to gain an edge in investing by defying conventional wisdom
High price-to-earnings ratios. Seasonal return adages. Tax rises. A weak (or strong) dollar. What do they have in common? Conventional wisdom claims all are bad for stocks. Most investors accept that unquestioned. Don't. Things 'everyone knows' are very often provably wrong. Getting that right gives you an edge. It isn't hard to do. Never presume common wisdom about what is good or bad for capital markets is correct. See it as a theory to test like a scientist should. Here is your 'laboratory' for doing just that. Little we see is truly unprecedented. So, you can easily test most basic claims against historical data. Many prove false. Example? An ancient market myth argues January's returns predict the full year's. Good January, good year. Bad January, bad year. This is simple to test with historical stock returns. Consider America's S&P 500 index in USD for its long and accurate history. Monthly data begins in 1926. Since then, January and the year were positive 52 times – 53 per cent of all years. Does this 'prove' January's predictive power? No. It simply shows you stocks are positive more often than not historically. The least common occurrence is a positive January preceding a down year – nine times. But a negative January preceded a down year seven times – slightly less often than it preceded an up year, 21 times. Not predictive or far off from a coin flip. Any 'strategy' reliant on cherry-picked data, like this so-called 'January effect', isn't viable. Or consider the widespread belief that high price-to-earnings (P/E) ratios hurt stocks and low P/Es are good. We can disprove this in our market laboratory also. Since 1926, US stocks' average 12-month trailing P/E (price divided by the last 12 months' earnings) is 17.7. Monthly P/Es topped this 476 times through May last year. Over the next 12 months, the S&P 500 fell 139 times and rose 337 times – a 70.8 per cent frequency of gains. The opposite of conventional wisdom. And for the 705 months with below-average P/Es, the next 12 months rose 78.4 per cent of the time. Together, this just shows you, again, that stocks rise much more often than not. Regardless of P/E. That's it. History shows many 'common sense' popular beliefs are false. Tax rises? Not reliably, repeatedly bad for the US, global or any major stock market. Britain lives this now, with stocks up nicely despite an April tax rise. Same with fears around high government budget deficits. Natural disasters. Trade deficits. Endless misperceptions hold for currency swings, too – up or down. Many fear the US dollar's recent 'weakness', claiming it portends the currency's global reserve status ending or that global confidence in America is gone – supposedly boding ill for US stocks. In the US and globally, weak currencies also fan fears of higher import costs fanning domestic inflation. Meanwhile, strong currencies spur endless fretting, too. European nations now fret importing deflation and slow growth as their currencies strengthen. But history shows stocks rarely react – regardless of the dollar or other currency's strength or weakness. Since 1973, when the index measuring the US dollar against a trade-weighted currency basket begins, the greenback weakened in 18 years. Stocks fell with it just two times … and rose 16 times. Now, that doesn't mean a weak currency is automatically bullish. But it certainly isn't bearish – and undercuts common 'wisdom'. Conversely, the dollar strengthened during 33 years since 1973. US stocks rose with it 25 times and fell eight times. All of this simply aligns with stocks' average frequency of returns throughout history. There is no investing strategy to glean here. No, history doesn't repeat perfectly. But investing isn't about certainty, ever. It is about probabilities. And history frames probabilities. If people say Thing X is bad for stocks, but X preceded good returns 70 per cent of the time, you absolutely know there is a high probability X isn't bad. You can't dismiss it, but you can study what else happened during the 30 per cent of history when X seemed bad. Maybe it was coincidence. Maybe you find Thing Z was also afoot, so you look at whenever Thing Z happened to see if it is reliably bad. If it is, and you can find a good, economically sound reason for why it would be bad, then you have precious information few others do. Another powerful edge to do better than others will. Even simply proving popular claims aren't true gets you well ahead. Markets pre-price widely known information, including popular beliefs and myths. When you can invest knowing common wisdom is wrong, opportunities abound to ride stocks' positive surprise.
Yahoo
31-05-2025
- Business
- Yahoo
Be Greedy When Others Are Fearful? History Says This Is What Happens When You Keep Investing Through a Bear Market.
If you invest a portion of your paycheck each week, you're dollar-cost averaging. Staying the course can help you bounce back from bear markets sooner. As tempting as it is to try to buy at the ideal moments, it doesn't matter much over the long term. 10 stocks we like better than S&P 500 Index › Most individual investors build their portfolios gradually over time, often investing a portion of each paycheck. You might not associate a name with it, but making gradual, routine investments over time is a strategy known as dollar-cost averaging. It feels good to invest when stock prices keep going up, but stick around the stock market long enough, and the pendulum will swing the other way. Stock prices do go down, and bear markets occur when the market declines 20% or more from its high. It's not fun, but it's normal. But bear markets can evoke negative emotions, such as fear and stress, and may prompt people to stop buying or sell and withdraw from the market altogether. But what happens if you stay the course, endure the pain, and keep investing through bear markets? Here is what history says. The stock market cycles between bull markets and bear markets. Historical data for the S&P 500 index (SNPINDEX: ^GSPC) says that the typical bull market is approximately 3.5 years long and gains over 100% returns on average. On the other hand, bear markets typically average a 35% decline from highs but last under 10 months. People often have short memories and emphasize the most recent data. By the end of a bull market, it can feel like stocks only go up. The sudden and sharp decline of a bear market can be a shock to the system. Analysis of historical market declines demonstrates how dollar-cost averaging through them can minimize the damage and help your portfolio recover sooner. The bear market following the dot-com bubble in the early 2000s was one of the worst downturns in recent history. Morningstar modeled how an investor who dollar-cost averaged into the S&P 500 would have fared from March 2000 to October 2022 compared to someone who made an initial lump sum investment. The data showed that dollar-cost averaging limited losses to just 1.75%, while the lump-sum investor suffered annualized losses of 13.84% during that time. The bear market during the 2008 financial crisis was another brutal stretch for investors. However, those who dollar-cost averaged recovered from it sooner. A Fidelity study determined that a hypothetical portfolio of 70% stocks and 30% bonds would have returned to its former highs in 52 months. Importantly, those who sold their investments or withdrew from the market took longer to recover, or never did. That's why investors must try to avoid making fear-driven decisions with their money. Remember that trying to anticipate stock market crashes is virtually impossible, no matter how many predictions or circumstantial evidence you find to support a prediction. But suppose you had a crystal ball and could invest an entire year's worth of capital at the perfect time every year. Wouldn't you blow away someone who dollar-cost averages? RBC Global Asset Management used data from Morningstar to find out. Their study analyzed what would happen if someone with a diversified portfolio invested $3,000 annually from 2005 to 2024: Investor 1 invested the entire $3,000 at the market's lowest point each year. Investor 2 dollar-cost averaged with monthly purchases. Investor 3 invested the entire $3,000 at the market's highest point each year. Investor 4 avoided the market entirely, saving their cash in an interest-bearing account. Unsurprisingly, Investor 1 fared the best, ending with $148,959. However, Investor 2 ended with $137,328, a total difference of just 8.5% over the entire 20-year period. Even someone who bought at the worst possible moment every single year wound up with $128,847, far more than someone who didn't invest at all ($71,785). The lesson? The length of time you stay invested is the most significant factor in your long-term results. Even perfect timing barely outperforms dollar-cost averaging over the long term, and you may even perform worse trying to pick and choose when to invest. Most people should stick to a simple, steady buying schedule, diversify their portfolio, and focus on consistency. That includes bear markets! Selling your investments or avoiding the stock market altogether can feel like the right thing to do during market downturns, but history shows it's probably not a good idea. Before you buy stock in S&P 500 Index, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the for investors to buy now… and S&P 500 Index wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $638,985!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $853,108!* Now, it's worth noting Stock Advisor's total average return is 978% — a market-crushing outperformance compared to 171% for the S&P 500. Don't miss out on the latest top 10 list, available when you join . See the 10 stocks » *Stock Advisor returns as of May 19, 2025 Justin Pope has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. Be Greedy When Others Are Fearful? History Says This Is What Happens When You Keep Investing Through a Bear Market. was originally published by The Motley Fool Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
