The Most Inevitable Headline of All Time: Dow Jones Industrial Average 2 Minute (.DJI)

After the Dow Jones Industrial Average 2 Minute (Dow Jones Indices: .DJI) hit a new record high this week, more than double off its 2009 lows, the Wall Street Journal published one of the most inevitable headlines of all time.

“Market Rewarded Those Who Stuck It Out,” it read.

You don’t say.

The only thing worse than suffering through a period like the last five years is suffering through and not learning anything from it. To me, there are three imperative investment lessons from the last five years. That “markets reward those who stick it out” is one of them.

For those who stuck out for the last five years, the 2008 crash — literally one of the sharpest wealth destroyers in history — is now a set of painful memories at worst, and a once-in-a-lifetime opportunity at best. If you did nothing, your portfolio is likely larger today than it was in 2007. If you bought steadily over the last five years, it’s probably much larger. Only if you sold near the bottom and hid somewhere else have you lost money.

History is clear on this: Hold stocks for a long time, and your odds of making money are very high. Since 1871, there have only been four periods when an investor purchasing stocks didn’t make money in real (inflation-adjusted) terms over a 10-year period: 1908, 1929, the late 1960s, and the late 1990s:

Source: Robert Shiller, author’s calculations.

If you purchased stocks once a month, every month, since 1871, 87.8% of your purchases would be profitable 10 years out, even adjusted for inflation. The four brief periods that left you in the red after a decade were invariably followed by above-average returns. That period includes the aftermath of a civil war, two world wars, a flu pandemic, terrorist attacks, droughts, presidential assassinations, depressions, recessions, crippling debts, bank runs, high inflation, deflation, oil embargoes and a dozen bubbles. Through it all, the market rewarded those who stuck it out. It is the same story time and time again. It was no different this time around, and it will likely be no different next time around.

What else did we learn of the last five years? One of my favorite quotes from investor Jeff Gundlach is, “In risk assets, you make 80% of your money 20% of the time.”

During the 21,000 or so trading days between 1928 and today, the Dow Jones Industrial Average 2 Minute (Dow Jones Indices: .DJI) went from 240 to 14,000, or an average annual return of 5% (not including dividends). If you missed just 20 of the best days during that period, annual returns fall to 2.6% — which is to say, half of the compounded gains took place on 0.09% of days. That’s the numerical version of Gundlach’s wisdom.