What if the market does not go virtually straight up as it did between 1982 thru 2000? What if we are indeed stuck in a multi year period of trendless, volatile or downward moving market? What if we are in a period similar to that of 1966 thru 1982 where the Dow Jones Industrial Average started at a level of 995.15 and 16 years later ended at 776.98. What is a long-term 'buy and hold' investor to do in such a case?
That 22% decline (excluding dividends) over that time frame in the DJIA would have made even the hardiest investor give up on the stock market. However, if you look at that entire period in segments, you would have seen a much different environment. The market did not simply go down year after year. It actually had very rewarding periods followed by extremely devastating times. Although the entire period would have been a losing proposition, the shorter term swings were extremely rewarding, especially if one was able to avoid the significant sell-offs.
If you study stock market history and look at the long-term charts, you can clearly see that there were some extended periods that were extremely rewarding. However, you can also see that these periods were followed by equally devastating sell-offs ranging from 24.1% to 45.1% with the overall end result for the entire 16 - year period being negative.
So, if this current market environment, which began in 2000, has any semblance to that 16 - period mentioned above, how is an investor going to best navigate these waters, especially if one is nearing retirement? Can one simply ignore the swings or worse; ignore the stock market by purchasing 4% to 5% CDs or other alternately safe low yielding vehicles.
My contention is no, one cannot ignore the swings or simply totally exit the stock market entirely! There are two ways I know of that an individual can navigate this type of long-term scenario. First, one can learn to employ a methodology that detects and takes advantage of the swings, entering near the lower range and exiting towards the tops. Or second, one could employ a vehicle that automatically locks in the gains while similarly limits or totally reduces the downside risks.