For many people, the best representation of the stock market is a roller coaster ride. Thus, many believe that after a long period of climbing, the markets are bound to see a considerable descend, if not pitfall, in some near future.
This vision is so ingrained in the imagination that you cannot persuade anyone by saying that what we need is a long-term investing. People will respond with one or two examples of horrible fiasco on which they built their beliefs and prejudices (in conferences, you can hear people talk about Nortel).
Thus, when announcing new highs for the major indices, the reaction of many investors is sceptical, along the lines of “the stock market is high, it has more upside potential… and it is due for a pitfall.”
This assumption is completely false. If you were to believe that after the first peaking that followed the 2009 trough, you would have missed the sixty other peaks that have occurred since (based on the S&P 500). Actually, to be more precise, the US stock market ended the week at a record of 63 different weeks since 2009. Think about it for a moment. If after the first week an investor, eaten by the possibility that it is the top from which everything will head downhill, decided to liquidate everything on Monday morning… To put it mildly, this investor would have missed phenomenal gains.
So what tells you that this is not the case today?
Some of you will answer that one day the stock market will crash and you do not want to be there. It’s true that one day the markets will be lower, but it is not really a rational argument. For despite all bear markets in history of crashes, crises, the Dow Jones, to name one, has provided an annual return of approximately 5.4% excluding dividends for 100 years.
If you take the data from Jeremy Siegel, you come to a total return (including dividends) of 8.1% from 1802 to 2012.
In this sense, it is normal that the stock market frequently reaches its highs as it continues to gain in value. One could even say that the actions are assessed at 0.03% per trading day (8% divided by 260 sessions, regardless of the few holidays in a year). What is abnormal in that sense is when the stock market does not appreciate.
In fact, to be precise, you do not see this assessment for two reasons. First, the market performance is not linear – instead of this beautiful 0.03% in regular session after session you have days of strong growth, followed by negative days and other days with the treading water.
The Exchange may, during certain periods, provide much higher returns than its historical performance and at other periods that can last for years have zero or very negative returns. But still, it tends to return to its historical performance.
The other reason is that with all the attention being paid to market fluctuations, investors forget what creates wealth on the stock market and explains the long-term appreciation of the shares. Yet it is quite simple: public companies making profits, part of which is paid to the shareholders and the other part is reinvested to increase their profitability. This is because companies appreciate year after year.
The stock exchange only reflects that assessment. So there is no reason to be afraid of heights in Exchange.