Riding the Stock Market's Long Rollercoaster

Stocks rise and fall. Smart investors stay on the ride.

Dealing with Stock Market Volatility

According to a Danish proverb made famous by physicist Niels Bohr, "It's tough to make predictions, especially about the future." That certainly holds true for stock markets, where the best we can do is look to the past.

Let's look at one day: Oct. 24, 1929, which ushered in the Great Depression. On that day, a panic on Wall Street caused a selloff, as stocks lost more than 11 percent of their value.

Now pick a different day, during the same Great Depression: March 15, 1933. Thanks to the passage of the Emergency Banking Act (which stabilized failing banks), stocks gained more than 15 percent in value on that day alone.

Day by day, the ride can get bumpy. But when you take a broader view, things look better.

Over Time, Stocks Rise More Than They Fall

Take the Nasdaq Composite, an index of companies that trade on the Nasdaq exchange. From 1998 to 2018, the Nasdaq gained more than 400 percent in value. Not bad when you consider there were not one but two major downturns in that stretch.

Then consider the Dow Jones Industrial Average, an index of 30 large-cap companies determined by a selection committee. Since its founding in 1896, the Dow has gained more than 50,000 percent in value. That's like planting a 12-inch sapling and watching it grow into a 500-foot redwood. That's a lot of lumber, based on growth that's far faster than inflation.

Someone with the foresight to invest just $10 in the Dow at the start of the Great Depression (equivalent to about $140 today), then leave it there and reinvest the dividends, would be passing on more than $1 million to their heirs today.

How Do We Know the Stock Market Will (Eventually) Go Up?

We can't prove the market will eventually rise. But it makes sense when you consider that, over time, ingenuity drives innovation, which increases standard of living, which drives economic growth. Many companies now in the Dow, like Apple and Cisco Systems-both of which trade on the Nasdaq—didn't exist 50 years ago. (General Electric, which was removed from the index in 2018, was the last original member.)

No one can predict when the stock market will hit its next high, or sink to a new low. But history shows that recoveries have been happening faster. The Dow took 25 years to recover from the 1929 crash. It took only 16 years to recover from the trough that began in 1966, and recovered from the 2008 crisis in just five years.

Still, it bears repeating (and repeating): There's no guarantee markets will recover quickly from routs. It is a painful truth that investors can lose a lot in the bad times.

Should I Try to Time the Market

"Timing the market could be costly." 

We all yearn for certainty—in life, in love, in our 401(k)s. It's tempting to think we can make the stock market "less bad" by timing our investments to hit the highs, and avoid the lows. Can that really be so hard?

In a word, yes. Studies show that timing the market usually means missing out on substantial gains. That's because only a handful of days are big gainers; picking them in advance isn't even possible for experts.

One study found that had you invested $10,000 in the S&P 500 index in 2003, it would have grown to more than $30,000 by 2018. But if you didn't have any money in the index during the best 10 market days during those 15 years, you'd have less than $16,000.

Ultimately, the best way to ride out the rollercoaster is to stay buckled in for the whole journey.