If investors don't understand market recoveries, they'll be disappointed later. Right now, the real problem is that many investors don't actually understand that not only are we in a market recovery, we've actually already had a market recovery. Take a look at the numbers:
March 9th, 2009: The Dow Jones Industrial Average closed at 6,547 and the S&P 500 closed at 676.53. Today, the Dow is up over 11,450 and the S&P 500 is north of 1240 (as of this writing). Most individual investors know this, but do they realize it? Given the amount of money I see flowing into bond investments, I'm not so sure.
Realize this—we have seen rallies like this before. Let's look back at the 1970's for a moment. An awful market correction took place from the beginning of 1973 through the last quarter of 1974. During that time, the S&P 500 lost almost 50 percent of its value. Sound familiar?
Investors must understand that a recovery is not a "feel-good" event. A quick search of headlines during this time yielded the following:
"Skittishness Is Mounting Among Investors, Some Advisors Urge Boost in Cash Position" —Wall Street Journal, Dec. 3, 1975
And this famous one:
"The Death Of Equities" —BusinessWeek, Aug. 13, 1979
Don't believe everything you read. According to American Funds, the average annual return of the S&P 500 between the publication of those two articles was more than 17 percent. Additionally, there were four drops of greater than 10 percent over the same period, unemployment hit 9 percent, there was an energy crisis, U.S. hostages were taken in Iran, inflation hit 13 percent, and, oh yeah, that little nuclear accident on Three Mile Island.
However, during that same time, we saw the creation of Microsoft, Apple Computer, and ATMs. That's some pretty significant stuff happening during a pretty awful-feeling time.
Again, we have seen this before. Need more proof? Let's look back at Black Monday—Oct. 19, 1987. This global stock market crash began in Hong Kong and continued to move across Europe and then into the United States. By the time the market closed for the day, the Dow Jones Industrial Average lost 508 points, representing more than a 22 percent loss. The S&P 500 lost more than 20 percent as well.
Think about how you felt over the past 24 months on days when the market had a 4 percent or 5 percent loss. Now imagine a 20-percent loss day. Do you think you'd be excited to invest again or even stick to a well thought out investment strategy after a day like that?
Again, not a feel good event. Another quick search of headlines between Black Monday and 1992 yielded the following:
"Small Investors Sit on Sidelines Watching Stock Market's Surge" —Wall Street Journal, May 18, 1989
"Uneasy Mood: As Economy Falters, Even the Affluent Are Fearful and Cautious" —Wall Street Journal, Dec. 25, 1991
And finally this one:
"Stocks Drop Amid Bleak Reports on Jobless, Manufacturing" —Wall Street Journal, Oct. 2, 1992.
Again, don't believe everything you read. According to data (provided by American Funds once again), the average annual return of the S&P 500 between Dec. 4, 1987, and Dec. 4, 1992, was in excess of 17 percent. According to Bloomberg, there where were two drops of greater than 10 percent over the same period as markets navigated bank failures, the Exxon Valdez oil spill, Kuwait's invasion by Iraq, and a U.S. recession.
However, during that time period, we saw the invention of cell phones, the World Wide Web took off, the tunnel under the English Channel was completed, and two wars ended—the Persian Gulf War and the Cold War. Again, that's some pretty significant stuff during a pretty awful-feeling time.
So get this straight. Investors need to ensure that they do not set themselves up for disappointment. Have some conviction and stick to a financial plan. Those who followed the headlines have been disappointed in the past. Not only are we in a recovery, but we've actually already had a substantial one as well.
What are the chances that someone will write a story in the future about the 2000's that reads a lot like those from the 1970's and late 1980's above? If they do, I'm willing to bet that along with all the bad news of TARP, Lehman, Merrill Lynch, housing woes, and deficits, you also read about iPads, mobile devices, Web 2.0, 4G, and other game/societal/business changing inventions and innovations.
David B. Armstrong CFA, is a Managing Director and co-founder of Monument Wealth Management in Alexandria VA, a full service financial planning and wealth management firm. Monument Wealth Management is backed by LPL Financial, the independent broker-dealer and Registered Investment Advisor. David has been named one of America's Top 100 Financial Advisors for two straight years by Registered Rep magazine (2009 & 2010) and has been interviewed by several national media sources for the past several years. David and Monument Wealth Management can be followed on their blog at "Off The Wall", their Twitter account @MonumentWealth, and on their Facebook page. Member FINRA/SIPC.
*The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate please consult your financial advisor prior to investing. All performance references are historical and are not a guarantee of future results. Asset allocation does not ensure a profit or protect against a loss.
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