“Nothing is harder to bear than a succession of beautiful days.” Consider those words by German poet-philosopher Goethe. That statement applies to human nature broadly, even if it's a bit of an exaggeration. It suggests that as we become used to having good things, we become less able to enjoy them because we gradually take them for granted.
Taken a different way, his words apply to the stock market, too, as investors and others watch from the sidelines wondering when, and whether, to buy or sell.
To people watching the stock markets, the succession of beautiful days represents the stock markets' seemingly relentless climb, without much of a pullback in 2013. The Dow and the S&P 500 are each up about 16 percent year to date.
The succession of beautiful days (aka the stock markets' climb) is hard for people to bear. Three types of people stand out.
First, there are certain investors who have owned stock through the market's climb. They are tempted daily to sell their positions because they want to lock in their gains.
Second, there are investors who think about adding to their existing holdings, but can't bring themselves to do so. They are uncomfortable buying “high,” after what they perceive as a big run up in prices.
And third, there are people who aren't invested in stocks, but would like stock-like returns. They have cash and may have other investments, such as bonds or gold. They also may have sold their stock holdings during the financial crisis, and have a lingering fear of owning stocks. Or perhaps they have never owned stocks but have the idea of owning them; especially when they see the stock markets doing well and think that others are benefiting.
Many of this third group of people won't invest now because, in their view, they've missed the boat. Implicit is the notion that the rise in the stock market is over. The market has to pull back, to correct or something worse.
Instead, taking their cue from the news headlines and talking heads, which don't give them much confidence in the way the markets or the country are headed, they seize on some bit of negative information that they take to be defining and catalytic.
It is not likely a coincidence that many among this third group who are not invested now, and have their reasons for that, were not invested in stocks when the markets were much lower either. Their reasons may have been different then, with the same result.
Is it possible that the market's rise is finished for 2013, or that the market may head lower? Of course it is. But for a long-term investor, that question should be beside the point. It's probably not a great time to buy stocks today for someone who may sell them a year from now. Anything can happen in a year. But a time horizon of 10 or more years makes short-term considerations much less relevant.
According to the 2013 Ibbotson Yearbook, a credible resource for market statistics, the average annual rate of return (including dividends) on the S&P 500 from 1926 to 2012 has been 9.8 percent.
Consider three (of many) plausible scenarios for someone buying stocks today, none bullish for the purposes of this illustration: First, the market flat lines from here, i.e., today's new investor gets 0 percent return for 2013 and the year ends up 16 percent (where the S&P 500 is now). Second, the market ends the year up only 5 percent, i.e., the new investor loses 11 percent for 2013. Third, the market ends the year down 10 percent, and the new investor is down 26 percent for 2013.
Assuming the 9 years that follow 2013 hold true to the historical average of 9.8 percent, the average return for the 10-year period from 2013-2022 would be 10.40 percent, 7.52 percent and 5.55 percent, respectively.
Actual results would likely be different, of course, and past performance never guarantees future results. But the lesson holds true: The 9 year period of typical performance following 2013 would go a long way toward mitigating the new investor's poor performance in 2013. That effect would be likely even more pronounced over a 20-year period.
Of the 78 10 year rolling periods during the span from 1926 to 2012, Ibbotson found that portfolios of 100 percent large stocks had a positive average annual return 74 of 78 times, averaging 10.5 percent per year.
Portfolios made up of 70 percent stocks and 30 percent long-term bonds were positive all 78 times, averaging 8.48 percent.
For 20 year rolling periods within the same time span, portfolios of 100 percent large stocks had a positive average annual return during all 68 of 68 periods, with the lowest average return being 3.11 percent for the period from 1929-1948, and the highest being 17.88 percent for the period from 1980-1999.
Time to buy?
Does this mean that people should put all of their money into stocks? No. But it does suggest that by sticking to a suitable and well-diversified plan, long-term investors who bear the beautiful days, and the ugly days too, have had the opportunity to do well with their stock holdings.
What about the would-be investors who can't bear the market's climb?
Maybe after selling or waiting they'll get back in, defying the old Wall Street saying that “now is always the most difficult time to invest.” But then again they likely won't be investing; they'll be in it for the trade.