If I could give you one piece of advice about investing, it would be this…
Stock market investing should be a lifelong endeavour.
Markets ebb and flow on a daily basis. Individual stocks will do the same.
But over time, as history has consistently shown, the stock market marches relentlessly upwards.
One of the biggest mistakes investors make is selling out at the first signs of trouble. Or selling out in anticipation of trouble ahead.
You may be nervous right now. Donald Trump is proving to be an unpredictable president, unlike one we've ever seen before.
Is that alone cause to panic, to sell everything in anticipation of a coming market crash?
On average, stock market corrections — defined as a fall of 10% — come along around once every year. No-one knows when the next one will come. No-one.
And if I was a betting man, I'd suggest the Donald's US immigration ban — whatever you think of it — would not be the catalyst for a stock market correction.
Let me be clear…
If you're not prepared for stock market corrections, and are not willing and able to watch many thousands of dollars of value wiped from your wealth in a matter of days and weeks, stock market investing is not for you.
Stock markets climb stairs and fall down elevators. The inexorable journey upwards happens over time. A few points here. A few more there. A wobble here. A flat period there.
In contrast, market corrections happen quickly, and unexpectedly. They hurt, sometimes a lot.
Over time, including dividends, on average the ASX has risen around 10% per annum. As such, it beats just about every other form of investment, even including property.
Stating the obvious, the gains don't come in a straight line, either days, weekly, monthly or yearly. They come over long periods of time… I'm talking 5, 10 and 20 years.
Many retirees read Motley Fool Take Stock. They may think they don't have time on their side.
I urge them to think again. A 60 year old can expect to live for another 25 years. That's time.
Over 25 years, assuming no withdrawals, a $500,000 SMSF balance compounding at 10% per annum would grow to over $5.4 million.
So much for running out of money in retirement!
Even if you withdrew $4,000 every single month — over 25 years that works out to $1.2 million of withdrawals — with 10% compounding returns, at age 85 you'd still have a balance of close to $500,000.
And I'm guessing many people reading this will have SMSF balances in excess of $500,000.
The flip side is the potential to generate such extraordinary wealth comes with risk. No pain, no gain.
Shares are risky, especially the small speculative ones. I'm forever astounded that so many smart people seem willing to punt large sums of money on penny mining stocks in the hope of striking it rich.
It's a total mug's game.
You have to deal with likely insider trading… meaning you'll be one of the very last people to get the "hot tip."
You have to be smarter, and faster than the institutions, complete with their complex algorithms and lightening fast computers.
And given most small mining exploration stocks never ever make a profit, the odds of a successful investment are totally stacked against you.
Compare that to the success story that is Corporate Travel Management Ltd (ASX: CTD).
It is profitable, growing quickly, and still has a long growth runway ahead. Just yesterday, Morgans slapped a $22 share price target on the Corporate Travel Management, suggesting 25% upside from today's $17.40 price.
Not bad for a stock that's already gained more than 800% over the past five years!
You can count my SMSF as one happy owner, having got into the stock soon after our own Scott Phillips recommended it to his Motley Fool Share Advisor subscribers. Since then, it has gained around 700% from Scott's 2012 recommendation. He still calls the stock a buy today.
None of these gains — 800% from Corporate Travel, or 10% per annum from the stock market over the long-term — comes if you bail out at the first sign of volatility. Or worse, in the last sign of volatility, like in March 2009, during the depths of the GFC.
Going forward, in this low interest rate environment, I'm the first to admit a 10% annual average return might be pushing things a little.
That said, if you can earn an average dividend yield of say 4.5%, franked to 75%, dividends alone get you a gross yield of close to 6%. Add in 4% per annum capital appreciation — a hardly heroic assumption — and you get to the magical 10%.
But one thing is certain — markets and individual stocks don't go up in straight lines.
And another thing is certain — predicting when stock market corrections and crashes will happen is impossible. So don't even try it. Or, as Warren Buffett has said…
"We have long felt that the only value of stock forecasters is to make fortune-tellers look good."
Instead, assemble yourself with a diversified portfolio of 15 to 20 high quality stocks. Ones whose earnings should march inexorably higher over the years. Companies like Webjet Limited (ASX: WEB). Like Bapcor Ltd (ASX: BAP). Like NIB Holdings Limited (ASX: NHF).
Not every stock will be a winner. But if you put the odds in your favour — and remain calm and rational during times of inevitable volatility, not selling in a panic but buying some bargains — great wealth can and will be made from investing in the stock market.
