As an investor it's important that you
stay grounded during good times. But it's equally important
that that you don't shy away from stocks and put all of your
money into cash equivalents, such as certificates of deposit or money market accounts,
every time there's a slump in the market. You stand a poor
chance of outpacing inflation over the long term if most of your
assets are tied up in fixed income securities and cash equivalents.
And one sure way of losing money in the stock market is to pull
your money out — and lock in your losses — at every
downturn, only to buy your way into the market again after it's
already bounced back.
As
an investor, it's wise to expect fluctuations in the value
of your portfolio. Just keep telling yourself that the market
has consistently rewarded the patience of long-term investors
who stay in the stock market for 20 years or more.
Jeremy Siegel,
The Wharton School
Jeremy Siegel of The Wharton School explains mean-reverting returns.
To properly evaluate the risk of stock investments, it's necessary to grasp a key principle: the longer you hold stocks, the lower your chances of losing money on them, and the greater your chances of earning a return close to the long-term average of 7.7% after inflation. That's because stocks have historically had what economists call mean-reverting returns — that is, over the long term, periods of below-average returns tend to be followed by periods of above-average returns, and vice versa.
Jeremy Siegel, 