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At the beginning of 1975 the S&P 500 Index was at 68.56. Since that time the S&P 500 Index has experienced an impressive growth rate to its current level around 1500. During that time the S&P 500 Index has had 25 years of positive gains and 7 years of negative returns. The best three years (1975, 1995, and 1997) were all greater than a 30% return, with the best year being 1995 resulting in a 34.11% return. Only four years (1977, 2000, 2001, and 2002) resulted in a double digit loss with the worst year being 2002 which resulted in a 23.37% drop.
For me, the historical returns of the S&P 500 Index demonstrate two valuable lessons: The importance of diversification and the value of time when investing in the stock market. While I am sure there are people that can correctly determine the best time to buy and sell stocks sometimes, I have yet to meet anyone that can consistently "time the market." However, if you can think in terms of "time in the market" instead of of timing the market, time becomes an ally rather than an obstacle. The more time your money is in the market, the more likely you are to achieve the historical returns of the stock market.
Of course, diversification is also a very important factor. Individual stocks are subject to many more "ups and downs" than a well balanced portfolio. This is why the majority of people trying to beat the market through short term trades fail. It is very difficult to be properly diversified when your portfolio is changing every day because of new trades being made. As a result, at some point, a risk factor that hasn't been properly diversified for will have a significant impact on the short term trader's portfolio. Overall, some of the most successful investors, like Warren Buffet, have been "buy and hold" type investors that have allocated their money to quality stocks and then let the market take care of the rest. Think of the stock market as a slow moving river, you can occasionally take a swim upstream against the flow, but it is much easier to swim with the current letting the market help push you along.