Three things to know about the stock market

Published on December 31, 2015   18 min

Other Talks in the Series: Hot Topics

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.
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Three things to know about the stock market

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