Wise Wealth Advisors

D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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This is how it works

Posted by Muthu on October 29, 2014

I want to share two points from this wonderful piece:

1) Apple increased more than 6,000% from 2002 to 2012, but declined on 48% of all trading days. It is never a straight path up.

2) Since 1871, the market has spent more than 40% of all years either rising or falling more than 20%. Roaring booms and crushing busts are perfectly normal.

Apple has multiplied by 60 times during the decade ending 2012. Still it went down on nearly half of the trading days. If you’re an investor in Apple and worried about it’s falling days (which was as much as it’s rising days), you would have lost the opportunity to generate 6000% returns.

We’ve also repeatedly mentioned that growth happen in spurts. Missing 10 or 20 best days in a decade can eat away large portion of your returns. So this kind of ups and downs on a regular basis is completely normal. I feel that the above Apple example is a representative sample of many stocks and may be the market as a whole.

As the second point mentions, in the last 144 years, during 40% of the years, the market rose or fell by more than 20%. Though the annualized returns from equities are good; we need to learn to live with higher standard deviation (volatility). A 20% rise or fall in a year is very normal. Sensex is now at 27000 levels. Going by this point, it can even swing widely between 21600 to 32400; which is perfectly normal. No explanation required. This is how it works!

As we say repeatedly, if you can learn to live with this volatility and even use it wisely, big money can be made. Withstanding volatility and having patience will really take you to great heights.

I came across a long term data- really long term- for 84 years- returns of various asset classes between January 1’st 1926 to December 31’st 2009. This pertains to the US markets.

30 days treasury bill: 3.7%

20 year Govt. bonds : 5.4%

Shares (Equity): 9.9%

Gold: 4.7%

Real estate: 0.70%

Average inflation: 3%

So there is no serious competition for equity (not even real estate) in the long run.

But don’t forget as to how it works.

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