Three Stock Market Lessons to Learn for Next Year

By David S. Chang

Stock Market Floor tradesThe performance of the S&P500 was relatively flat this year, however there was enough drama behind the scenes to provide some valuable lessons for us all. Here are three stock market lessons that can come in handy as we look at the market for 2016! Click here for more tips on SMART Investing and what you can do to profit from the stock market.

  1. The Pros don’t always get it right. Every week I receive a doomsday stock market prediction that the crash of 2008 will be coming again and that it will be worse. One person in a recent speaking engagement went as far as to give me the exact date it was supposed to happen! Thankfully that day came and went. There will always be someone complaining about the Fed, the global currency crisis (and selling gold bars at the same time!), our political leaders, and even those with dire religious predictions. On the flip side we have talking heads predicting the next best stock to buy, how a certain strategy will always beat the market, and expert newsletters that will show you how to make money in an up or down market. As of December 30th of 2015, the S&P is hovering around 2,070. Last December, the median year-end target for 2015 by top investment strategists was 2,213 according to Bloomberg, off by 7%. The bottom line is that the pros don’t always get it right. In my opinion, Warren Buffet is the greatest investor with an outstanding track record, but even he has bad years. One of his largest holdings is Walmart, at about $3.3 billion. Year-to-date the stock has been down over 30%. Buffet also owns $17.2 billion of IBM and 15% of American Express. Both are down 14.5% and 24% respectively. Berkshire Hathaway since 1964 has increased by a mind-blowing 1,800,000% compared to the S&P 500 which has increased by 2,300% during the same time period. But this year shares of Berkshire have trailed the market, falling 9%. If the pros can’t get it right all the time, then what is the lesson? It isn’t about timing the market, but time in the market. Stay fully invested and disciplined. The market rewards those that are patient!
  2. Don’t expect repeat returns. Since the bottom of the market in March of 2009, the total return of the S&P 500 has been over 176%, with an annualized return of 16.27%, well above historical norms. Going back to 1900, the average annual returns have been 6.5%, since 1970, 5.9%, and since 1980, 7.96% per year. What is the lesson learned here? While planning for the future, use realistic assumptions. The S&P’s return for 2015 was essentially flat. While I believe it will be more than this for future years, do not be surprised if the market does not perform like it has the past 6 years. Also remember that the returns are averages out over the long-term. It doesn’t mean you got 8% a year since 1980, but up 31% in 1997, down 23.4% in 2002, up 26.4% in 2003, down 38.5% in 2008, up 29.6% in 2013, and so forth. This all evens out to an annual return of 8% since 1980. But, the average investor only got 2.5%, why? Because they weren’t fully invested the entire time, but bought in at the high and sold at the low. The key thing is to stay focused on your goals and let the market work for you.
  3. Some sectors will perform well and some may not. Despite the lackluster performance of the broad market, three of the ten sectors of the S&P500 did well: consumer discretionary (10.31%), health care (6.74%), and technology (5.95%). At the beginning of this year, analysts predicted the energy sector would perform the best, but it has performed the worst, down over 23%. What is the lesson learned here? Diversify! Hold broad market lost-cost funds such as ETFs and index funds that are allocated according to your risk tolerance, goals, time horizon, and personal situation. 

David S. Chang

Award-Winning Entrepreneur, Wealth Manager and CEO | Chief Editor, Author, Keynote Speaker, Consultant | Political Consultant | Army Officer National Guard | Living To Fulfill Needs, Solve Problems, and Live Passionately!


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