Do you want to know a few facts about the stock market that 98% of people don’t know?
Knowing a few eye-opening facts about the stock market can help make you a better investor and make you look like a financial genius in front of your friends.
Most people want to impress you with knowledge of their greatest stock picks or discuss the P/E ratios of different stocks.
Those facts don’t matter to long-term investors. Those facts are for traders.
You, my friend, are an investor.
What’s the difference?
A trader is someone who is constantly buying and selling stocks in an attempt to get rich quick; this is the worst way to create wealth.
An investor is someone who is patient and invests for the long-term. They understand the fundamental facts about the stock market, and their goal is to create wealth.
Buffett once said, “The stock market is designed to transfer money from the active to the patient.”
To be a better investor, understand these 5 Mind-Blowing Stock Market Facts to create Wealth.
5 Mind-Blowing Facts about the Stock Market
The Stock Market Decreases 10% (or more) About Once a Year
A stock market correction is when the market (i.e. the S&P 500, DJIA, etc.) drops 10%. A correction happens about once a year.
When you have money in the market during a correction, it can be scary.
Consider having saved $300,000 in your company’s 401(k) plan. During a correction, your account would lose $30,000 or more.
Ouch! Would you be able to stomach a drop that intense?
Even the most brilliant investing enthusiast probably doesn’t know how often a correction happens.
Why is this important?
If you understand the stock market experiences a correction about once a year, then you know it typically isn’t a big deal. It isn’t a big deal because even with those declines, the long-term returns of staying invested in the market is usually an average of 8% or more.
You want to stay invested during these corrections because you don’t want to miss the market rebound. Pulling your money out of the market will only ensure a loss.
The Average Stock Mutual Fund Investor Earns Only 3.69%
Gary Antonacci uses the DALBAR study to point out how bad most people are at investing.
He wrote in his book, Dual Momentum Investing, “Over the past 30 years ending in 2013, the S&P 500 had an annual total return of 11.1%, while the average stock mutual fund investor earned only 3.69%. Around 1.4% of this underperformance was due to mutual fund expenses. Investors making poor timing decisions accounted for much of the remaining 6% of annual underperformance.”
When you dig deeper into the DALBAR study, you realize the reason most people have such poor performance is that they get scared.
They sell when the market is low and buy when the market is high. Exactly the opposite of sound investing.
Most people are better off investing in an S&P 500 Index Fund and let it ride!
What’s more staggering is a $10,000 in the S&P 500 over that 30 year period would have generated a $275,139 nest egg.
The average stock mutual fund investor had a paltry $30,201 in their account.
Instead of timing the market, stay invested.
Bear Markets Become Bull Markets
How would you have reacted if I told you to invest $50,000 in March of 2009?
If you forgot, this was around the time the entire world thought the U.S. financial markets would collapse. The stock market dropped 57.6% from 2007-2009.
Would you have had the guts to invest money then?
I hope your answer is yes because the market increased 67% over the next twelve months. Your $50,000 would have increased to $84,750.
Warren Buffett said, “Be fearful when the others are greedy, be greedy when others are fearful” because he understands that it’s always darkest right before dawn.
To clarify, a bear market is when the market drops 20% or more from its peak. A bull market is when the markets continue to increase.
These two market trends typically go hand in hand. Following a bear market, we usually experience a bull market.
Take a look at theses markets dating back to 1929:
The problem is we don’t know when the end of a bear market will turn into a bull market; this is another reason to stay invested.
Missing the Best Days in the Market is Devastating
Quick: Name the 20 best days the DJIA has had during the past 15 years.
You probably couldn’t! If you could, then you are a stock market junkie.
The reason I asked is if you can’t recall the best 20 days from the past, you are not going to know them looking into the future.
And missing the best days in the market is devastating to your portfolio.
Consider this information from Precedence Capital. This chart is showing the growth of $10,000 invested in the DJIA and what happens when you miss the best performing days:
As you probably noticed, staying fully invested or never pulling your money out is your best option. During the past 15 years, you would have earned 7.28%
Missing the markets best ten days and your return dwindled to 2.60%
Missing the best 20 days, you lost .25%.
Missing the best 30 days and you had a negative 2.58%.
Finally, missing the best 40 days and you lost 4.63%!
Again, this information makes the case as to why you need to stay invested.
WARNING: Actively Managed Mutual Funds
In the book Money: Master the Game, Tony Robbins wrote, “An incredible 96% of actively managed mutual funds fail to beat the market over any sustained period of time.”
Instead of buying high priced mutual funds, you are better off investing in index funds.
Warren Buffett believes in the power of index funds so much he made a million dollar bet with the hedge fund company Protege Partners LLC. Each party wagered $500,000.
In 2008, Buffett bet that an S&P 500 Index Fund could beat a portfolio of five hand-picked funds by Protege Partners.
Buffett chose the Vanguard 500 Index Fund Admiral Shares. The funds Protege Partners chose were never revealed.
After nine years, the index fund has averaged 7.1% and a total return of 85.4%. The funds picked by Protege Partners have averaged 2.2% and a total return of 22%. The bet ends next year.
There is no doubt index funds are a powerful tool for any investor. To learn more about how to be a great investor, check out my article here.
These five facts about the stock market are indeed mind-blowing and important because knowledge is power. Most people know don’t know much about the stock market and believe it’s risky.
The real risk is not knowing anything about the markets. As Warren Buffett said, “Risk comes from not knowing what you’re doing.”
With the five mind-blowing facts you just learned, you know more than 95% of the population. Use them to become a better investor and impress a few friends.