It’s at times like these – when the volatility of stock markets really challenges your resolve to go the distance with shares – that it’s important to go back to why you are in stocks in the first place. So, let’s look at six solid arguments for being a long-term investor in shares.

One

History shows that seven out of every 10 years are good for stocks and we are now giving history a nudge as we move into the fourth year since the GFC started in October 2007. Of course, the past two financial years have seen shares actually rise between 5-6%, and when you add in dividends, a good portfolio with a bias towards income would have returned 10-12%.

Two

I love this one! This week, Stan Stovall from S&P Capital IQ pointed out that we have a once in a blue moon event happening that is historically good for shares. He says when the collective dividend yield on the S&P 500 index going forward is greater than the yield on the US 10-year government bond, stocks tend to rebound 20% in the ensuing 12 months!

Three

Michael Knox, the chief economist at brokerage house RBS Morgans, made the point on my SWITZER program on Sky Business that based on US company earnings, the index should be 30% higher and the same goes for our S&P/ASX 200. He concedes that European debt issues have to be sorted, but if they can get their act together, there is an enormous stock rebound waiting to happen.

Four

Rudi Filapek-Vandyck of FNArena made a great point on my program this week, which underlines his philosophy on shares, and this aligns strongly with my own. He looked at what would have happened if you invested $1 million in David Jones or Rio Tinto back in 2003. If you had gone for that great company Rio, that $1 million would now be $2.4 million, which is about a 140% return – that’s not bad.

But what would have happened if you had punted on David Jones? You’d now have $4.5 million, but earlier this year the figure was closer to $6 million! Rudi argues that capital gain eras come and go, but the value of being an investor who chases income is always a sound strategy – especially now.  (You can watch the video on our website here.)

Five

Vanguard has shown that if you invested $10,000 in shares in 1975 and let it roll over, reinvesting the dividends, by 2009 the value of your investment would be around $453,000!

Six

This is one I always remember: Paul Clitheroe’s Making Money book showed a US study by a university professor who demonstrated that timing the market is for mugs. The study by Professor William Sharpe of Stanford University in 1972 basically confirmed that if you changed your investments annually based on current market perceptions you would have to be right 70% of the time to increase your portfolio’s value.

Clitheroe looked at what you received if you remained fully invested in stocks between 1979 and 2006 and the average per annum return was 11.4%. However, if you were playing the in-and-out game and you missed the 10 best trading days, your return dropped to 9%. If you missed the best 40 days, the return plummeted to a tick over 5%.

There are other historical reasons for why you should be in shares now, and these relate to what stocks do in the two years before a presidential election. They normally rise, but we could be living through really odd times that could beat the law of historical averages this time around. On the other hand, we could be in one of those times when a lot of people are running to cash ahead of one of those unexpected big bounces in stocks.

I don’t know if that will be the case, but I do know that sticking to good quality companies that pay dividends pays dividends!

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Also in today’s Switzer Super Report

• JP Goldman: How risky is your ETF?
• Charlie Aitken: Have we hit the bottom?
• Tony Negline: How the contribution rules change at 65