My son turned 4 years of age the other week and it was a weekend full of parties and eating. One of my son’s favourite toy is Lego. His imagination and creativity runs wild. I’m one of those dad’s that keeps the instruction manuals in a folder – I mean c’mon, how else will you know how to build the original toy Lego had designed with all those parts? Although I did recently find out that Lego’s website stores all the instructions. Maybe I’m just a little old fashioned…at 35 haha!
Anyway, this got me thinking about how often we, as investors, deviate from what the stock was always designed to do. We seem to lose the instruction manual too often and our imagination and creativity seems to run wild like my 4 year old son with his Lego.
So I decided to take the liberty and list 30 facts about the stock market. What it was designed to do, how it operates, it’s performance and behaviour, and some of the facts that many folk in our industry seem to ignore:
- Stock markets exist and were conceived in order to allow companies to raise equity from the public in exchange for shares in that company.
- For every seller of a company, there is a buyer.
- For every buyer of a company, there is a seller.
- Over the long-term, the Australian share market has returned 8.5% pa.
- On average, the number of times the stock market moves up or down 1% within a day is 57 times over one year. In 2017 we witnessed 20 +/-1% days, and in 2018 so far we’ve witnessed 6.
- Australia makes up 2.1% of the world’s stock market. The US makes up 52.2%.
- The Australian stock market is made up of 40% in banks, and 18% in mining.
- Since 1926, we’ve witnessed 10 bear markets (declines of 20% or more). On average, the decline has been 45% and lasted for just over 2 years. The shortest was 3 months, and the longest was 5 years.
- Since 1926, we’ve witnessed 11 bull markets (including the current). On average, the climb has been 159% and lasted for 3.5 years. The shortest was 13 months, and the longest 9.5 years.
- Since 1926, we’ve experienced 15 recessions. That’s 1 in every 6 years.
- The average recession lasts 15 months, and the average expansion lasts 47 months.
- Over long periods of time, small company stocks beat large company stocks.
- Over long periods of time, the average investor under performs the stock market by a about 5% pa.
- Over long periods of time, professional investors under perform the stock market 77% of the time.
- Over a rolling 10 year period, the stock market has not lost money.
- The biggest gains in stocks are made while the company is on the way to the top, not after the gains are made.
- The stock market returns double digit gains or losses in 70% of all calendar years.
- The stock market lost almost 90% of it’s value during the great depression.
- The Japanese stock market has done nothing since 1989.
- Dividends make up about 42% of an investor’s return.
- If you missed the best 10 days in the stock market over the last 20 years, your portfolio would have returned 67% less than the market. If you missed the best 40 days, your portfolio would have returned 114% less than the market.
- If you missed the worst 10 days in the stock market over the last 20 years, your portfolio would have returned 150% more than the market. If you missed the worst 40 days, your portfolio would have returned 952% more than the market.
- 90 days of the year generates around 95% of all the year’s gains.
- The US stock market rose 22% last year. 25% of that return came from 5 companies. 10 companies made up 35% of the return. 23 companies accounted for half the return. Apple’s return alone was responsible for of the index’s total return then the bottom 321 (of the S&P 500) companies combined.
- From 1980-2014, 40% of all the Russell 3000 stocks lost at least 70% of their value and never recovered.
- The stock market has experienced an average intra-year decline of 13.8% every year since 1980.
- The average return of stock markets are between 8-12%, yet stock markets see gains within this range only 5% of the time.
- The stock market produces a positive return 3 in every 4 years.
- The stock market produces a negative return 1 in every 4 years.
- Stocks go up most of the time.
The stock market needs to be looked at as owning a piece of a company, a business. The ownership or worth of a business represents it’s futures earnings power. I strongly believe that as technology progresses, as we become more innovative and efficient, profitability should increase, and therefore businesses become more profitable, and businesses become more valuable – on the whole. During this process, we’ll witness and many of us will experience default. But I believe this is part of the evolution and progress.
Returns on the stock market are not promised to anyone, nor are they guaranteed. Having said this, the track record of the stock market is compelling. If you’re patient and disciplined enough, you too may be able to participate in what it has to offer.
Index Fund Advisers
JP Morgan – The Agony & The Ecstacy
JP Morgan – Guide to Markets (Australia)