If you’re a normal human being you’re just trying to live your life, and you use the stock market just to make yourself richer and save for your retirement.
Last week various voices on Wall Street announced that “we”—meaning the stock market—are now in a “new bull market.” If you’ve heard the news you may be wondering what, if anything, that means for you, your investments, and above all the possibility of retiring earlier, or richer, than you had planned.
Read: The bull market has left these 20 companies behind, but they are primed for growth
Nobody has all the answers—least of all me. But I do have some of the questions. So here’s a simple Q&A.
Why is Wall Street saying we’re in a “new bull market”?
Because the S&P 500
SPX,
stock index, which includes the 500 most valuable companies on the U.S. stock market, has risen 20% from the lows hit last October.
Is that the definition of a “bull market?”
It’s one of them.
What are the others?
How much time do you have?
OK, so what is a bull market?
A long period when the stock market keeps rising, and rising, and rising, and investors get rich.
When do you know you’re in a bull market?
Afterward.
No, seriously.
Yes, seriously. Afterward.
What does a bull market look like?
Think of the most famous: the 1950s-60s, and the 1980-90s. From 1948 to 1968 the S&P 500 grew your wealth about 900% in real, purchasing power terms: After inflation. From 1981 to 1999 the stock market grew your money nearly 1100%, again in real terms. Oh, and we had another bull market from 2009 to 2021, when the S&P grew your money 400% in real terms. During these times, to make money, you didn’t have to be smart. You just had to be invested.
Is this a new bull market?
Nobody knows. But note that those long bull markets when everybody got rich were quite different from these short-term technical indicators, such as the market rising 20% from its lows. As far as I can tell they don’t mean much of anything.
Why do bull markets matter?
Because that’s when the stock market has made all of its long-term returns.
How so?
During those long bull markets, the stock market made you an average return of 13% a year. That’s in real, purchasing power terms, meaning after deducting consumer inflation. Meanwhile, at least since the late 1920s, the average real return across all the other years was negative. The rest of the time, on average, you lost purchasing power.
So you need to invest during bull markets to make money?
No.
Huh? Why not?
Because that’s only one way of looking at it. Sure, the market lost money on average outside of these bull markets. But that’s really only because of the outsize effects of a small number of terrible, but short, bear markets.
The market collapsed from 1929 to 1932, again from 1937 to 1941, in 1973 and 1974, from 1999 to 2002, and in 2008. During those brief periods the S&P 500 lost, on average, 18% per year in real terms. That’s where the losses were. (It also fell 23% in real terms last year.) So if you had a crystal ball you probably wouldn’t care about the next bull market as much as you would care about avoiding the next bear market.
What about the rest of the time?
During the rest of the time, when the market was neither in a “new bull market” nor in a plunging bear market, it still did just fine. The average return was 8% a year above inflation. That’s well below the returns seen during the booms, but way ahead of cash, CDs, or bonds. (Repeat: These are numbers after inflation.) Even better: If you invested during these bear markets and hung around for long enough, until the next bull market arrived, you made a fortune. That’s because even though it’s during a bull market that a stock market posts new highs, it’s during other times that it sets new lows.
Nobody made more money than those who bought stocks in 1931-1932, or in the mid-’70s.
So, does a new bull market matter, or not?
Not really. For those of us saving long-term, “time in the market” beats “timing the market.” In other words, it’s more important to invest long term and stick to it than it is to try to time the next big move in the market.
The longer you’re in the market, the better your chance of winning—and the more you are likely to win. Which is great news for long-term savers, though not for short-term traders.
Since at least the late 1920s, the U.S. stock market has produced a median five year return, in real, inflation-adjusted dollars, of about 50%. (Median means the middlemost return, if you ranked them all from best to worst.) But about one time in four you would have failed to keep up fully with inflation, and lost money in real, purchasing power terms.
Stretch your investment horizon out to 10 years, and your chance of losing money even after inflation dropped to around 15%. Stretch it out to 20 years, which is far less than the average retirement savings timeline, and you didn’t lose money once. And that’s not just in simplistic, nominal terms, but after deducting the ravages of inflation. You beat the CPI every time.
The median return over those 20 years was just under 300%, meaning you quadrupled your money. Again, that’s in real, purchasing power terms.
This post was originally published on Market Watch
