Friday, February 27, 2009

Putting the market in perspective

In overheard conversations, I sometimes hear someone say they’d like to take all of their money out of the market or their retirement fund or even their bank and bury it in the backyard, or perhaps tuck it under the mattress. I get the sense that while they’re laughing, they’re not all that far from being serious.
We’re seeing some serious panic now among consumers, many of whom haven’t seen a big recession in some time. It’s to that end that the Family Investment Center invited B.D. Horton, a certified financial planner and certified public accountant who is Vice President of Territory Sales for American Century Investments, to speak to our friends and clients. Horton is a smart guy who works for a well-respected company, and we think highly of him. As we thought he would, he gave some terrific perspective for the financial crisis we’re now in.
First, he traced the roots of the crisis. We got here because of many falters in the financial system, but the primary driver of the recession is the sub-prime mortgage mess. As I think most folks know by now, financial institutions routinely loaned money when they should not have to people who clearly didn’t have the means to pay it back. In many cases, the cards were stacked against them. Interest-only loans that never allow someone to build any real equity in their home and loans that require gigantic balloon payments after a few years were going to work in very rare instances. It was a system that was designed to fail. On top of that, mortgage-based securities put investments at risk when those mortgages failed. There were also all other types of credit problems that really are tediously distracting, so we won’t get into those here.
What really grabbed my attention was the next slide Horton showed us. This looked at the length of recessions in months, going back to 1945. The most recent recession was in 2001, and lasted eight months. The two lengthiest recessions were in the early 1980s and the mid-1970s. Psychologically, that makes this recession tough for many to stomach. If you do the math, many of today’s late 30s to 40-year-olds were only born in the late 1960s to early 1970s. They’ve never managed money inside of a recession. So to them, this is particularly terrifying.
Horton traced his way through the many things that have happened inside our current recession. It’s just about too depressing to repeat. So let’s not. Instead, let’s get right to why he’s optimistic about the recession of 2009. Horton’s research shows that when a bear market ends, the rebound is steep and plentiful. Within one year of the end of a bear market, the stock market has been up, on average, 36 percent. In examining consumer confidence, he showed that at nearly every point when the level has dipped low, as it has now, it begins to rebound.
The average bear market runs about one-fifth in length of the average bull market. Further, the average bull market grows by over 100 percent, while the average bear loses a third of that. So, by the averages, it makes sense to wait out the bears to profit from the bulls.
It can be tempting to try and time the market by pulling money out and putting it back in when it is at the lowest point. But be careful. Horton told us that for the 20-year period ending December 31, 2007, the S&P 500 has an average annual return of 11.8 percent. The average equity investor has a return of just 4.3 percent annually during that same 20-year period, or only about one-third of the average annual return of the S&P 500. Think about the long-term average – the life of the investment, not the short-term. Look at what it’s done in 10 years, not 10 months.Horton noted that the time of greatest opportunity is often right about now. Stock is on sale – the question is always which stock, and how much is it really worth? That’s the million dollar question, meaning if I knew that, I’d be the next Warren Buffet. Stick to the principles that have long-guided you in investing. Remember, there is always risk to investing. Set your goals, and work towards them.
I'd love to hear from you - what are your plans for your investments? Have you pulled out of the market? Are you thinking about it? Are you buying?

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