Bad Times Past – and Maybe Passed
There is something narcissistic about each generation that sees things as not merely unique but also in the superlative extreme – the best of times, the worst of times, record setting, uncharted waters, etc. As bad as headlines may read, there have been a number of times when the market outlook was far worse than now. If one invested in the midst of these prior calamities, how did he or she fair thereafter? While troubling events certainly had negative implications that damaged markets, the impact has always been temporary. Whether recovery took a year or a decade, recovery indeed occurred. Even if one had the misfortune of investing right before a precipitous drop, within 20 years – usually much sooner – rates of return were positive and higher than interest on cash. Further, if one invested after the shocks but still amidst troubling times, such as during the depression or wartime or the mid-70’s turmoil, eventual returns were even better and sometimes quite extraordinary. At present, much of the bad news of the current cycle is behind us. This is not to suggest that we are at some sort of bottom and that stock prices will imminently spurt upward. But we have already adjusted expectations to the oil, real estate, and financial sector woes. It is not a stretch to believe that in a decade one will be happy for having maintained or even expanded stock holdings at this time.Historic Perspective
Instead of focusing on those occasional troughs, it is instructive to look at an encompassing history of the market and simply recognize the extremes. Consider every possible 1-year, 5-year, 10-year, and 20-year investment horizon.Annualized Asset Group Returns: 1928-2007* | ||||
Investment Horizon | 1 Year | 5 Years | 10 Years | 20 Years |
Stocks Best | 53.99% | 28.56% | 20.06% | 17.88% |
Worst | -43.34% | -12.47% | -0.89% | 3.11% |
Average | 10.05% | 10.05% | 10.05% | 10.05% |
Bonds Best | 30.71% | 19.80% | 13.80% | 11.07% |
Worst | -2.66% | -0.37% | 0.78% | 1.64% |
Average | 5.04% | 5.04% | 5.04% | 5.04% |
Cash Best | 14.04% | 10.93% | 9.04% | 7.64% |
Worst | 0.02% | 0.06% | 0.17% | 0.49% |
Average | 3.77% | 3.77% | 3.77% | 3.77% |
- Cash returns have never been negative for periods of 1 or more years
- Bond returns have never been negative for periods of 10 or more years
- Stock returns have never been negative for periods of 20 or more years
- Bonds have returned about 30% more than cash
- Stock returns have been about double that of bonds.
Do NOT Try to Time the Bottom
The tendency to panic at the worst time is not new; nor is the rush to get into something well after hype has inflated prices. Numerous studies confirm the fact that mutual fund shareholders garner worse returns than the funds in which they invest. Often shares are bought at high prices after good news and advertised growth excite interest. Conversely, shares are frequently sold at low prices after discouraging news has already had its impact. Statistically, there is a broader reason not to pull out or otherwise try to time the market. While stocks have provided the highest return over time versus bonds and cash, much of that extra return has occurred in large one-day spurts. Information flows rapidly. The catalysts of major market movements, such as Federal Reserve action or a political event, create instant reevaluations and sharp movements. Market reversals, from bear to bull and vice versa, are often sudden and intense. To illustrate, if you invested in the S&P 500 for the 20 years 1988 through 2007, your assets would have grown at a compounded annual rate of 9.13%. If you missed only the best 30 days, out of a total of 5,043 trading days, your annual rate of return would have been 2.86%. It would be a shame to take on all the risk of the stock market and then under-perform bonds and cash simply by trying to guess market bottoms.“Timeless” Advice
The notion of disciplined investing is not limited to weak markets. As demonstrated, maintaining or increasing stock positions when prices are low is a sound strategy. Equally sage, one should not become euphoric in strong markets. Many investors were burned in 2000 after jumping on the internet bandwagon in the late 1990’s. Other sectors such as oil in the 1980’s and real estate on multiple occasions harmed fad chasing investors in a like manner. Allocate your assets to stocks and bonds in an appropriate manner given your long term goals and tolerance for risk. Maintain this allocation in good times and bad – adding to that which has fallen and trimming that which has risen when imbalances become apparent. Stated otherwise, when you shift investments, buy low and sell high. Don’t get suckered into doing the reverse.This article was originally published in New Jersey Lawyer September 1, 2008.