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It's Not So Bad

posted on

May 22, 2014

On May 13th, 2014 the S&P 500 grazed the 1,900 mark for the first time ever. In the past two years we have seen this index cross new thresholds repeatedly, reaching 1,600, 1,700 and 1,800 in the last year alone. With each new high investors are asking the question, “How long can this continue?” Many are bracing themselves for the inevitable pullbacks that are inherent in capital markets, pullbacks which unnerve us but are often healthy after experiencing extended periods of market growth. 

I am a planner by nature. I often try to assume the worst case scenario that could occur in a particular situation and make plans for what I would do should that scenario arise. Not to mention driving me crazy, this planning has added about five pounds to my purse, since who knows when you might need an extra pair of shoes, pepper spray, a sewing kit, band aids, or batteries? Investors are the same way. They try to predict the future by anticipating all possible financial or economic disasters and adjusting their portfolios accordingly. This leads them to abandon certain asset classes if the outlook is gloomy, liquidate their portfolios if they fear a downturn, or hold off on particular purchases until things appear a little more “certain.” 

Our clients already know that making investment decisions based on a hunch or a feeling is not prudent, and that the predictions of market prognosticators and talking heads are wrong more often than they are right. They also know that investing in risk appropriate, globally diversified portfolios of passively managed mutual funds is the first step to achieving investment success. But what about those investors who know the right way to do things but still get nervous? What if you still ask yourself “How bad can it get?” or “Will I ever be able to survive another market crash?” I hear plenty of people say that they have been able to survive market pullbacks or crashes in the past but they don’t have the time frame to survive another one. 

There are few people alive today who can say that they lived through the Great Depression when the markets dropped 80%. However most of us are familiar with Black Monday, the Dot-Com Crash, and most recently, the Great Recession that caused markets to drop 55%. We can’t bear to think that a crisis of that nature is possible again, but the reality is that most of us will probably live through another market crash at some point in our lives. What you may not know, however, is that according to Mark Hulbert as he wrote in a recent article published in the Wall Street Journal, “Since 1926 it has taken an average of 3.3 years for stocks to surpass their high set before the typical bear market began.” When you think about it that way, it’s really not so bad! Even in the absolute worst case scenario, the market reached a new high (compared to its pre-crash high) 7.5 years after the Great Depression and 5.3 years after the Great Recession. 

While most people are confident we are nowhere close to another recession, it is helpful to remind ourselves of the facts while the sun is still shining. And the fact is that we all have a bit more time than we may have expected. Markets will rise and markets will fall, but the disciplined investor can withstand even the worst that history has thrown at him!

Source: Hulbert, Mark. “ Don’t Fear the Bear.” The Wall Street Journal. 7 March 2014.