It's been a wild ride in the U.S. stock market recently, and August has seen several days of dramatic swings higher or lower. This recent bout of choppiness is a good reminder why it's helpful to view stocks as a long-term investment.
Five years is about the minimum amount of time that many experts recommend you should plan to be invested in stocks. That's because the market is more likely to fluctuate in the short term, meaning you could lose money. Over longer periods of time, though, it's always turned higher again.
Still, the past five years have been good for investors — and part of one of the best decades ever.
If you had invested $500 in an exchange-traded fund (ETF) that tracks the performance of the S&P 500 on August 15, 2014, that would be worth about $800 as of August 15, 2019, according to calculations by Grow. That works out to a return of more than 60%.
Rather than calculating the change in prices, which is almost 50% in that time frame, we've calculated the total return. That assumes you reinvested the dividends you earned each quarter.
When you own an ETF, or even an individual stock, you'll usually be paid a quarterly dividend — a portion of that company's or fund operator's profit — that you can use to buy more shares. Your returns will be greater when you reinvest your dividends over the long run, so that's an easy way to grow the value of your portfolio.
The U.S. stock market is currently enjoying the longest-running bull market in history, at 10-plus years and counting. If you'd invested $500 in the market 10 years ago, you'd have more than double the total of a five-year investment today: about $1,850. That's because while stock prices generally increased throughout, the strongest gains came early in the decade, and there's been more bumpiness recently.
The past five years, including 2019's year-to-date performance, have seen average annual gains of about 7%. To compare, the 10-year period has seen average annual returns of about 10%, which is on par with the market's long-term average annual gains.
That's why experts recommend a buy-and-hold mentality with index funds. It's a simple but effective approach championed by, among others, investing legend Warren Buffett. You give yourself time to benefit from the market's rally — and recover from any slumps along the way.
Finally, you should regularly add money to your portfolio. That way you have time on your side, which is key for long-term investing success, and you'll potentially buy at times when stock prices are lower.
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