Today’s Take: To make the biggest gains, you have to look at the bigger picture in the markets.
If you want steady returns each and every month … don’t invest in stocks.
In other words, if you like carousels and hate roller coasters, a savings account is the best investment you could make.
But if you can live with the ups and downs of the stock market, higher returns are your reward.
The best example of riding the stock market roller coaster is October 19, 1987.
This Tuesday marked the 34th anniversary of Black Monday.
And boy, do I remember it well…
Leading up to it, the Dow Jones had been soaring all year. And the S&P 500 was up more than 35% by the end of August 1987.
At the time, my money management firm was just a few years old. But something didn’t seem right…
Only a handful of stocks were actually rising. The rest of the broad market was just jogging in place.
This split in the market caused my indicators to flash a yellow caution signal. And by the beginning of October, they were flashing red.
So, I moved all our clients to money markets on October 6 — just two weeks before the crash. In just that one day, stocks plunged over 22%.
That move put us on the map. We finished the year up, outperforming the S&P 500 Index by a country mile.
To this day, experts still aren’t sure what exactly caused the market’s biggest one-day drop in history.
You can take your pick of culprits: portfolio insurance, higher interest rate fears, mounting U.S. trade deficits and more…
But the bottom line is that the reason didn’t matter. So, today, I want to show you the importance of looking at the bigger picture in the markets.
Look at the Bigger Picture to Make Bigger Gains
Just a few weeks after Black Monday, stocks found their footing and started moving higher again.
And since October 1987, the S&P 500’s total return has been 3,674%, including dividends.
(Click here to view larger image.)
But many investors who got caught up in the crash swore off stocks forever. They couldn’t see the bigger, long-term picture. And that was a big mistake. They missed out big-time on the bull market that followed.
Here’s the real talk: Volatility is the price investors pay for above-average returns.
In fact, since 1980, the S&P 500 has seen intra-year declines of 14% on average. That’s shaken a lot of investors out of the market.
Yet if you look at the bigger picture, the index had positive returns for 31 of those 41 years — 75% of the time. And with dividends reinvested, its return since 1980 is 11,527%!
It never ceases to amaze me that most investors never achieve results anywhere close to that. Even though the market has been up 75% of the time, they let volatility knock them out. What a shame.
But for those who have the proper temperament to deal with both the ups and downs of the market … higher returns are your reward.
So, the lesson I’ve learned in the aftermath of the 1987 crash — and the five other bear markets since then — is that it doesn’t pay to time the stock market.
By trying to time the market, you tend to sell low and buy high … the exact opposite of what you need to do to make money with stocks.
And if you do manage to reinvest after getting shaken out, it’s usually many years later, making you miss out on the biggest gains.
I’ve found it much easier to make money in the stock market by investing in businesses in industries with huge tailwinds that are run by outstanding CEOs … especially when they’re trading at attractive prices.
By buying stocks when they trade for less than the underlying worth of the business, you don’t have to worry about the economy, interest rates or the annual rainfall in Brazil.
You can sleep easy at night and let time do the heavy lifting.
Founder, Alpha Investor