Be Realistic When Investing In Stocks

Published November, 1999

Dave Williams, Edward Jones, Medina Office

    The market’s performance over the past several years has led some investors to expect exceptional returns. The key words here are “expect” and “exceptional.”
    Webster’s Collegiate Dictionary defines “expect” as “to consider probable or certain.” It defines “exceptional” as “forming an exception, rare.” Obviously, combining the two doesn’t make sense.
    If you’re not convinced, let’s put the market’s recent performance into perspective. Over the past 70 years, the Dow Jones Industrial Average has returned about 10 percent annually. This figure includes price appreciation and dividends. Over the past 10 years, the Dow has returned 18.6 percent annually, well above the historical average. In the past four years, the Dow has posted even more impressive returns:
    1995 return -- 33.5 percent
    1996 return -- 26.01 percent
    1997 return -- 22.9 percent
    1998 return -- 18.2 percent

    Obviously, the returns we’ve recently enjoyed are extraordinary. Thus, they should be enjoyed, not expected.

Don’t Be Shortsighted

    A strong market and its exceptional returns can result in misleading track records for individual investments. Nearly any investment, even a mediocre one, can post a strong performance in an exceptional market. Because of this, it’s especially important during times such as these to examine an investment’s long-term track record before committing any money.
    If possible, look for companies that have a track record of at least 10 years. This time frame will show how well the investment has fared in a variety of market conditions.
    Even when market returns aren’t exceptional, the market is a great place to be. Over the past 70 years, stocks have outperformed nearly every other kind of investment. And, the market isn’t as risky as many investors believe.
    Over those same 70 years, if you had stayed invested in the stock market over any five-year period, you would have had made money 89 percent of the time. If you had stayed in the market over any 10-year period, you would have made money 98 percent of the time, and if you had stayed in the market over any 15 year period, you would have made money. Period.
    We’ve all heard the tales of investors making fortunes in very short time periods. History, however, tells a different story. Most investors make money over time, not overnight.
    Instead of focusing on investments that may produce phenomenal returns from time to time, focus your efforts on building a portfolio that can stand the test of time. It’s a much surer method of turning your financial dreams into realty.
    For more information, call Dave Williams at Edward Jones: (330) 723-4014.