A History Lesson on the Stock Market
Before we ever risk a dollar in the stock market, there are some things we know ahead of time.
We know that the stock market will rise and fall, sometimes violently. Right? We know that. We also know that crises of various kinds will come along from time to time to temporarily make matters worse. They're inevitable. We know that.
And hopefully we know that the key to our success will not be our financial brilliance (or else most of us would immediately be disqualified), but whether we have the self-discipline to think objectively when others are acting emotionally.
If you're a stock investor, the past several months have provided a gauge of your mental toughness. Most people believe they can handle risk. This market has put that self image to the test. If you've been anxious about your portfolio this summer, your stock allocation is likely too high for your risk temperament.
Hopefully, you've passed with flying colors and you're still on board with your long-term plan. Good for you! But in case you could use a little encouragement right about now, this history lesson should provide a shot in the arm to your efforts to stay on course.
In the graph below, the upward sloping line is a picture of the S&P 500 stock index from 1948 to the present. The graph is logarithmic, meaning it shows price changes in percentage terms rather than dollar terms. In order to give you the big picture, it's been smoothed out to eliminate fluctuations of less than 20% (bear markets are commonly defined as selloffs of 20% or more). On the graph, I've added dots indicating ten events which, at the time, created great turmoil in U.S. and world affairs. These "crises" were primarily triggered by political factors, not investing ones. On each occasion, fear was rampant. The emotional atmosphere was similar to the one we're experiencing this summer, and worse.
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Here are three lessons that this bit of history has for us:
1. Geopolitical crises typically have only a temporary dampening effect on stock prices. On average, stocks were 7.3% higher six months after the onset of the ten crises shown.
Only the 1973 Arab-Israeli war occurred near the beginning of a bear market. In that instance, shortly after hostilities began, all the Arab oil-exporting countries announced an embargo on oil shipments to the U.S. and other countries that had voiced support for Israel. Prices climbed four-fold and the U.S. economy entered an 18-month recession.
2. Periods of sustained weakness are going to happen, but they are relatively rare. The bull markets run further and last longer than the bear markets. Your investing game plan should take this fact into account. The long-term investor should look at periods of weakness as temporary buying opportunities rather than sell signals.
3. During your wealth-building years, it pays to stay invested in stocks. (I'm referring to a diversified portfolio, such as those in the S&P 500, not individual stocks.) Reflecting the strength of the U.S. economy, stocks have been—through wars and crises of many kinds—on a long, upward march for decades. Looking at the value of your holdings on a daily/weekly basis is to be avoided. It fosters emotional decision-making. The decisions of successful investors are driven by the mind rather than the heart.
Short-term fears can overshadow your long-term confidence. Today's news is tomorrow's history, and it's in His hands. So rest in His promise: "For I know the plans I have for you," declares the LORD, "plans to prosper you and not to harm you, plans to give you hope and a future." (Jeremiah 29:11)
© Sound Mind Investing
Published since 1990, Sound Mind Investing is America's best-selling financial newsletter written from a biblical perspective. 
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Originally published July 08, 2008.
