Financial Tip Friday: Why Long Term Trends Matter

Financial Tip Friday: Why Long Term Trends Matter

This is a post I have been wanting to write for a while, but for whatever reason I hadn’t gotten around to it. I know several of my friends and lots of my former students who still refuse to put themselves in the stock market. For some of them it is because they struggle financially.  But for most it is because they prefer to spend their money on immediate gratification or they view the stock market as nothing but casino gambling. When I hear this from people I want to shake them awake because I believe (and I am not alone) that we are in the early stages or near a 10-15 year upswing in stocks.

Let me back up a second to tell you what I mean. After lots of reading and study I am a believer in historical trends. The past is not prologue, but I do think that it can be a good general guide for approaching investing. History doesn’t repeat itself, but it certainly does rhyme. For example, the stock market has an average return of just about 10% for the S&P 500. If you pick a point in time on the S&P over a 20 year period you will find that you have more money at the end of those 20 years than what you started. What I am saying is that investing is really one of the best, if not the best, opportunity people have to grow their wealth and potentially leave a legacy for their children.

But there is something more going on here. A lot of people got spooked by what happened during the 2007-2009 bear stock market. Unfortunately, a lot of people lost money and that made them gun shy toward investing. I understand that. I get it. But since March 2009 the stock market has tripled. I believe that in 2009 we put in a turn in the bottom that marks a long-term trend or what is also known as a secular bull market.

Secular trends are long-term trends in stock market investing. These trends tend to last 15-20 years of both bull and bear markets. Here is a good chart that demonstrates these trends. Embedded within these secular bull and bear markets are cyclical bull and bear markets. In other words, in a long-term bull-market you can still encounter one to two cyclical bear market (defined as a stock loss of at least 20%). So stocks don’t just go up forever or go down forever within longer-term trends. As a side note, in secular bear markets stocks over the long-term don’t actually go down precipitously they actually just move sideways. In other words, there isn’t as much gain as their would be in a secular bull market, but there is usually very small yearly gains.

What Does That Mean For You?

So you might be asking yourself so what? What does this have to do with me? What i am saying is that 2009 potentially marked the beginning of a long-term trend that, if we go by historical averages, will last an average of another 10 YEARS at least! With an average rate of investment return of over 12% by not investing in the stock market I believe people are losing money. They are spending it all now and have little to show for it in the future. They are giving up long-term financial health for short-term gratification.

What If You Are Wrong?

Look it is certainly possible I am wrong and I AM NOT SAYING that the stock market will just continue to rocket higher. There will be another bear market. There will be stock market losses. There will be several more in my lifetime. But if I were a gambler and I had to bet someone I bet that in 20 years the money I have invested in the stock market will be exponentially higher than it is now. I would even say 10 years from now. A year from now, maybe not. But even if it isn’t exponentially higher getting people to save more for their future is a GREAT thing. We all should be putting aside money for retirement, no matter who you are. In fact, I think it should be a government mandate (another post for another time) because Americans are so woefully unprepared for their retirement future.

The Bottom Line

The bottom line is this: I believe in long-term stock market trends. I believe we are in the early stages of along-term bull market or just about to begin one that will bring a long-term market of potentially 10-15 more years (the average secular bull market lasts 18 years). Within that long-term trend there will be probably at least one if not two cyclical bear markets, but at the end of that trend stocks will be much higher than they are today.

This also means that within 10-15 years we will probably have a long-term secular BEAR market where stocks won’t do as well over a long-term period of time.  But I don’t think that will happen until I am in my 50s. And when it does and if this blog is still around I will write a post discussing how i will be investing at that time. No matter what I am staying in. I am a long-term investor. I believe historical trends are on my side.

Remember, do your own research! Talk to a financial professional if it helps you understand these trends. Invest for the long-term and find investments that fit your lifestyle, your risk tolerance, your long-term goals. Only you can determine those things. But I do believe that if you do start investing in the stock market or invest more than you already are you won’t be disappointed over the long-term. I know I am doing that.

What do you think about these long-term trends? Do you invest for the future? If so, how much?

3 thoughts on “Financial Tip Friday: Why Long Term Trends Matter

    1. I really do think that we are in for a long-term secular bull…either in the early stages (second inning) or we are about to move into one. The only thing that gives me pause is that in the other two transitions from bear to bull in the 20th century, there were three bear cyclical bear markets embedded within the larger secular bear market trend. So far we have only had two….but there are many folks who stated that March of 2009 we started another secular bull market. Either way it means at least 10 more years of solid stock market gains. Of course, there will be another bear market or two in there, but it should be minor compared to 2000 and 2008.

  1. The approach of looking at past 10 years annualized returns is a good indicator to explain past trends, but I think we’d have to use it looking into the future to make decisions today. For example, if the S&P stays flat for the next 3 years, in 2019 the 10y annualized returns will still be ~10%. If we don’t expect much more than that, then we may have already “maxed out” the potential 10y returns in 2016 (or even 2015).

    Another approach I find interesting to estimate future returns is what Warren Buffett refers to as the market cap / gdp, his ‘yard stick’, a measure that he uses to estimate future returns. I think this is another way that he times the market. Not on a day to day basis, but in a macro sense:
    It suggests that the next 5-10 years are likely to be meh, using a similar method to the indicator you refer to but with different data.

    Do you think this helps explain if we are in a secular bull/bear market and what phase we’re in? This is an area I don’t have much knowledge on and I’d be curious to know more!

Comments are closed.

Comments are closed.