Oh, how easy it is to get distracted by the day-to-day fluctuations in the market. Many investors have a herd mentality. Poor jobs report? Suddenly gold prices spike. A major CEO has the flu? Their company’s stock falls ill as well.
The best investors, however, step back from the herd and take a long view of their portfolio. These guys and gals have read up on their history, and they know that the gains of today can easily be swallowed tomorrow or that today’s dire drop in the stock market will eventually bounce back. Here are three important financial history lessons that smart investors know:
Every Bear Will Eventually Turn Into A Bull
The first decade of the 21st century took investors for a loop, and many still haven’t fully recovered emotionally from the shock of the Great Recession. (Watching up to 50% of your retirement savings get wiped away in a matter of weeks will do that to a person). However, history shows us that the stock market eventually recovers, even from its greatest lows. Even the Great Depression didn’t last forever.
Bubbles Come and Go
Do you remember where you were when the great Tulip Crash happened? Oh, that’s right, you weren’t even alive yet. Tulipomania as it’s fondly called, took place in 1637, when “investors” irrationally bid up the prices of tulip bulbs to more than ten times the annual income of a skilled craftsman. Less than 100 years later, we had the notorious South Sea Bubble in 1711. Then came the soaring stock markets of the 1920s, followed by the crash on 1929. Bubbles are not a new phenomenon, and smart investors look out for them and avoid the impetus to buy, no matter how alluring the temptation.
Don’t Panic
In 1972, TIME Magazine ran a cover story titled, “Is The U.S. Going Broke?” Sound familiar? In 1998 another issue of TIME asked, “Is The Boom Over?” and a 2008 issue proclaimed “The New Hard Times.” The truth is that no matter what century or decade you live in, someone will be warning that the sky is falling.
Many people see these headlines and their shrinking investment portfolios and pull everything out (usually toward the bottom of the market). Smart investors make adjustments to their portfolios but largely stay the course. This behavior is rewarded over the long term as, historically, the stock market has always grown.
Take a lesson from history and look beyond the small gyrations of the hour, day, month, and year. Invest for the long-term, and history says you’ll be a winner.