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0:00
Hello, I'm Ramon DeGennaro.
I'm the Haslam Professor
of Banking and Finance,
at the University of Tennessee.
0:08
Just how "good"
is a "good" year for stocks,
and just how "bad"
is a "bad" year?
The answer to the "good" part
is really, really good.
Sadly, the answer
to the "bad" part
is really, really bad.
I recommend
that you be seated
for this next part.
Between the years 1926 and 2012,
the best one year return
was in 1933.
Stocks returned
almost 58 percent.
The worst one year return
was in 1931,
a loss of almost half,
just under 45 percent.
Now some of you are thinking,
at least, the downside
is less damaging
than the upside.
Think again!
If you start with $100
and suffer a 50 percent loss,
then you have $50.
It takes a gain of 100 percent
to make up for that
50 percent loss.
Those numbers are saying
that the worst year
and the best year,
just about cancel
each other out.
You'd have about 90 cents,
if you started with a dollar,
and then experienced
the best year
and the worst year back to back.
1:22
Many people think
that the longer
you stay invested in stocks,
then the safer you'll be.
They think that stock prices
eventually rebound
after declines.
Looking at historical
rates of return,
over different time horizons,
tends to support that.
For example,
look at the vertical bar
on the left,
that's the range of one year
holding period returns.
From 1926-2012,
one year returns varied
from a loss of about 44 percent,
to a gain of about 58 percent.
Extend the period to two years,
and what happens?
The range of returns
indeed does narrow.
The biggest loss
is about 37 percent,
and the biggest gain
is about 38 percent.
For 10 years, the range is
from about a 2 percent loss
to a gain of about 19 percent.
For 50 years,
the range shrinks from
a gain of about 7.4 percent
to a gain
of just over 13 percent.
And holding periods of 75 years,
you can say
that the rate of return
is right around 10 percent,
whether you have a good
75 years or a bad 75 years.
The range is only from 9.4
to 11.7 percent,
that's just
2.3 percent per year.
Understandably,
lots of people interpret this
as showing that the longer
you stay in the market,
the safer you'll be.
Many of you have seen
this idea promoted before.
And if you haven't,
then you will soon, I promise.
