*This article was an op-ed by Tony Robbins, originally published by CNBC.
Understand How Markets Work and Avoid Behavioral Mistakes
It’s no secret that the US stock market has periods of immense volatility. Unfortunately, this volatility causes investors to make irreparably poor decisions (i.e., selling everything and going to cash only to miss the recovery). Let’s explore a couple of facts that will dispel your fears during tumultuous times.
Corrections are a constant. On average, corrections happen about once per year (since 1900). A correction is a 10% drop, but not more than 20%. When I first heard this stat, I was blown away. Corrections are a remarkably regular occurrence, but they are usually nothing to fear. On average, they last 54 days and 80% of the time, corrections do NOT turn into a bear market. That means 4 out 5 times the market has shrugged and moved onto new highs.
The stock market rises over time. Despite many short-term setbacks, this is undoubtedly the trend. For example, The S&P 500 index experienced an average intra-year decline of 14.2% from 1980 through the end of 2015. But in the end, the market ended up achieving a positive return in 27 of those 36 years. That’s 75% of the time! Point being, most of the short-term volatility should usually be ignored.
Harnessing the Power of Compounding
We all know that starting to save early is important, but most of us don’t. Frighteningly, some studies have shown 60% of American’s don’t have $1,000 saved for retirement. Most people falsely believe they need to hit a home run or earn a heck of lot more before they begin can save. This is simply untrue if, and only if, you start early!
Get this: A 19-year-old, who saves $50 PER WEEK, will save $2,600 per year. If they do this until age 65 and average a 10% annual return (i.e., about the S&P 500 average return over the last 90+ years (1926 through 2018), they will have over $2.2 million at age 65!
Sure, most reading this aren’t 19 years old, so we now we likely have to play catch-up. (Side note: make sure to send this to your kids or grandkids!) You must make the decision to not be left behind and begin saving today – no matter what it takes. This is especially true for Millennials who came of age during the financial crises of 2008 and are still fearful of the markets. Sadly, the Dow Jones is up 300% since 2009 and many have missed a huge opportunity to participate in this unprecedented bull market – a fact they will undoubtedly regret.
