The stock market has been going through another rollercoaster ride.  In the last 3 months the Dow Jones Industrial Average has swung up and down in a range of about 10% of its value.  In early November the Dow experienced two drops of more than 300 points within five days, enough to get even the most resolute investors on edge.  All this volatility seems to be driven by negative and positive forces that seem to be battling each other in the marketplace, engaging bulls and bears on daily combat influenced by the news of the day.

On the negative side, the housing market crisis continues to be a major concern as it starts to impact the broader economy.  Several financial powerhouses have already announced billions of dollars in write-offs due to their extensive exposure to securities tied to sub-prime mortgages.  Worse yet, no one knows how many additional write-offs are yet to come.  Furthermore, the price of oil is reaching new records, impacting the price of gasoline which in turn reduces the disposable income of consumers, the most important driver of the economy.  Not to mention the additional inflationary pressure that high oil prices put on the economy, as the increase in the price of oil and gas gets passed on to the general price of goods.  Last but not least, the dollar seems to be on a free fall, increasing the price of imported goods and the risk of inflation, and reducing the attraction of foreign investments in the US, which pressures interest rates.  How depressing!

On the bright side, the Federal Reserve has been lowering interest rates to stimulate the economy.  This is great news for stocks.  As they say on Wall Street, do not fight the Fed!  In addition, stock valuations are currently very reasonable and earnings growth is strong.  Tech stocks in particular are doing extremely well, lead by companies like Google, Apple, Intel and Oracle.  The world economy keeps on expanding with developing countries like China, India and Brazil driving additional demand for goods as the standard of living of their vast populations increase.  This looks like the perfect scenario for a strong bull market.  How exciting!

So which is it?  Bull market or bear market?  Depending on the news of the day, sentiments can change dramatically, driving the extreme volatilities that we have been experiencing recently.  The question is, how does the successful investor react to the realities of a manic-depressive market?  To answer this question, let’s take a look at some very key statistics.  The data below shows the minimum and maximum real returns on stocks at various holding periods:

1 Year – maximum return 53.41%, minimum return -37.29%

5 Years Annualized – maximum return 43.35%, minimum return -15.13%

10 Years Annualized – maximum return 17.78%, minimum return -4.29%

30 Years Annualized – maximum return 10.52%, minimum return 4.48%

What this data shows is that in a short period of time, the stock market can be quite risky and the type of volatility that we have been experiencing is to be expected.  But the longer your holding period, the less risk you incur.  In fact, the data shows that in any 30 year holding period historically there has been no losses in the stock market.  The bottom line here is that successful investors should ignore the short-term volatility and focus on the long-term returns of the stock market which has rewarded investors immensely.

Focusing on the long-term is perhaps the most important vaccine against this manic-depressive market.  But it is not the only medicine.  In the article What to Do about the Ups and Downs of the Market we discussed other techniques to help you achieve success in your investments, including diversification, dollar-cost averaging and ignoring the hype from the media.

Seeing your savings drop by as much as 6% in 5 days can be very scary.  Suddenly your hard earned savings and your dreams seem to be at risk.  But the biggest risk of all is to pull out of the stock market at the wrong time.  Studies have shown that missing just a few of the best returning days in the stock market can have a dramatic impact to the long-term returns of your investments.

No one knows what the stock market will do in the short-term.  And quite frankly no one should care.  Although past performance is no guarantee of future returns, historically staying the course with your long-term investment strategy has shown to be the best course of action to achieve financial success.

You probably already knew all this.  But we all need to be constantly reminded of the fundamentals of successful investing so that we don’t succumb to the pressures of a manic-depressive stock market.