newsletter
Staying The Course
February 2009
Why do we advise staying the course even during difficult times?
An article in the Wall Street Journal on
Javier Estrada, a finance professor at IESE Business School in
Barcelona, Spain, has studied the daily returns of the Dow Jones Industrial
Average back to 1900. Prof. Estrada found that if you took away the 10 best
days, two-thirds of the cumulative gains produced by the Dow over the past 109
years would disappear. Conversely,
had you sidestepped the market’s 10 worst days, you would have tripled
the actual return of the Dow.
“Although we could make a bundle of money if we could accurately
predict those good and bad days,” says Prof. Estrada, “the sad
truth is that we’re very, very unlikely to do that.” The moments that made all of the
difference were just 0.03% of history: 10 days out of 29,694. ¹
We see this kind of data reported all the time, but
we’re sure this is something the general public rarely hears from the news
media. Another report we read
recently in a newsletter from American Funds included the following:
During the last two centuries, the 10-year average annual total return
of large-capitalization
Looking back to every point when the market returned less than 2.5% for
10 years, it then returned an average 13.3% for the next 10 years, with a range
of 7.1% to 18.6%. Of course,
historical results are not predictive of future returns.
Market retreats, including the recent
decline, can lead some investors to sell stocks in favor of such relatively
safe investments as government bonds or insured bank deposits.
But the returns of the S&P 500 dating back more than 70 years
indicate that investors may be doing real damage to their long-term finances by
trying to time the market. ²
We have for
quite some time discussed intellect vs. emotion and in the same American Funds
newsletter there was the following:
In 2002, Daniel Kahneman received the Nobel
Memorial Prize in Economic Sciences for his work with Amos Tversky
showing that investment decisions were affected by a variety of issues, including
herd mentality, overconfidence, pride and regret. They also found a human tendency to
respond much more strongly to losses than to gains – a tendency that
drives many investors out of the market during acute declines. ³
The conclusion that can be gained from all of this is that
no one knows when the market will go up after a recent downturn, but the
evidence suggests that investors would be best served by ignoring the bad news
and their instinct to flee and not try to time the market.
Another question that comes up quite often during bear
markets is, “Will my investments
ever get back to their previous high and how long will that take?” The enclosed chart* produced by Putnam
Investments does a good job answering that question. If history is any indication, the next
rebound will take a much shorter time than most pundits are predicting.
P.S. “Let me be clear on one point: I can’t
predict the short-term movements of the stock market. I haven’t the faintest idea as to
whether stocks will be higher or lower a month – or a year – from
now. What is likely, however, is
that the market will move higher…well before either sentiment or the
economy turns up. So if you wait
for the robins, spring will be over.”
Warren Buffet,
October 2008
¹Zweig, Jason. “Why Market Forecasts Keep Missing the Mark.” The Wall
Street Journal 24–25 January 2009: B1
²"Investing with a sense of history" American
Funds Winter 2009 insights, p.3
³ “Avoiding bear market mistakes" American
Funds Winter 2009 insights, p.5
*Please contact our office if you would like to
receive a copy of the Putnam Chart.
Securities
through KMS Financial Services Inc.
520.884.7550
jpw@financial-architects.com brienne@financial-architects.com
3971 E. Paradise Falls,