Investors who look at the average return on shares over the long term will find that it is generally higher than for other asset classes. The advantage of investing in the stock market is therefore undeniable. However, if you look at annual stock market returns, you will see that they are extremely volatile. This high level of volatility is what sometimes puts investors off, causing them to hesitate and often lose the confidence to take the first step.
What we should take away from all this is that, while there is no denying the advantage of investing in the stock market, crises will always be a part of it. It would be a lie to tell you otherwise. The stock market will always have ‘good’ and ‘bad’ years, but nobody can accurately predict which it will be at the start of any given year! A ‘good’ year is not necessarily followed by a ‘bad’ year, and vice versa. With that in mind, the best way to take advantage of the average return on the stock market is this: first of all, invest in the stock market each year – thus making it a long-term investment – and, secondly, invest on a global scale.
Investors who are afraid of the impact of crises on their capital do not necessarily need to steer clear of the stock market. Rather, they should invest a smaller portion of their capital in the stock market, but maintain that investment at all times. They should also try not to seek out the ‘best’ time to buy, as what tends to happen is that they gain confidence (following successive rises that they missed out on) and subsequently sell when the markets have fallen. The stock market certainly has its place in a diversified portfolio, but it requires a long-term vision.