Last week we reviewed the importance of perspective and patience when it comes to managing your investments amidst troubling economic news. Some of you embraced my message. Others, however, were downright unimpressed.
One critic responded rather emphatically “not another supposed investment guru saying stay in!” He was proud to announce he exited the market in October 2006. None of that “buy-and-hold, beautifully diversified, low cost, modern portfolio investment strategy” for him. Sixty years of experience had taught him everything he needed to know about successful investing.
The question is, was my dissenter really better off to have sat on the sidelines for the past nineteen months? Be it 200-day moving averages or economic tea leaves, the naysayer’s believe they own the golden ticket that beats the market.
As for me, I seek clarity. Facts reveal wonderful truths.
The National Bureau of Economic Research (NBER) reports the U.S. economy has experienced 10 recessionary contractions since World War II. Amazingly, patient investors did not automatically lose money during each recession. Quite the contrary. Here is how the numbers break down, from the month the economy peaked to the trough month signaling the bottom of the contraction:
U. S. Economy Recessionary Contractions since World War II (NBER)
Peak Trough Total Return of the S&P 500
November 1948 October 1949 + 4.12 %
July 1953 May 1954 + 27.57 %
August 1957 April 1958 - 6.51 %
April 1960 February 1961 + 18.40 %
December 1969 November 1970 - 3.45 %
November 1973 March 1975 - 17.90 %
January 1980 July 1980 + 16.14 %
July 1981 November 1982 + 14.66 %
July 1990 March 1991 + 7.64 %
March 2001 November 2001 - 7.18 %
This is remarkable news. The stock market went up in six of the last ten recessionary cycles. The average positive return was an astounding 14.76%.
Yes, there were four cycles where the S&P 500 lost money and investors saw their accounts decline by an average - 8.76%. But what would that really mean to you?
Let’s say you had $100,000 and were the king of bad timing. You somehow found a way to only invest during the worst 104 months of the U.S. economy since 1948 and got out just in time to miss every recovery.
Did your terrible timing obliterate your account by the end of the tenth recession (November 2001)? Not at all. Your account would have grown by 4.5% per year and be worth $155,061. Not great, but certainly a far cry from the financial doom most prognosticators would forecast.
Those four losing cycles undoubtedly hurt. I won’t deny declining account values feel bad. Your job is to avoid the common mistakes investors make when they allow their feelings to interfere with their best interests.
Why? Because the patient investor who stayed fully invested over the past 60 years saw her $100,000 grow to a very cool $72 Million.
No, it is not the facts that get us into trouble.
The brokerage world has an amazing array of expert salespeople who are very good at what they do. Playing on your concerns and pitching a strategy designed to out-think the market is a wonderful sales technique. You can spot the obvious charlatans. It is the multitude of competing voices that makes your task difficult.
Where should you turn? My advice is to pay a visit to someone who does not have a stake in your decision. Visit with a local finance professor. Ask them for their thoughts on the merits of market timing and technical analysis. I’ve yet to read an academic study that supports market timing. Perhaps they will know of one. Or, as I suspect, he will endorse sixty years of research investigating how markets really work.
Now back to my sidelined antagonist. I looked at the returns of my firm’s portfolio models since October 2006. Each model had a fee adjusted return of over 7%. Clients invested in these portfolio models have more money now than they had in October 2006 and it remains invested for the long-run. They do not worry about when to get out. They will not worry about when to get back in. They did not worry about capital gains taxes since they did not sell. They did not worry about transaction costs when they sold or when they bought back in.
They are globally diversified. Their costs are exceptionally low. They never paid a dimes worth of commissions or excessive fees to us or to their fund company. Sure, some of their stomachs fluttered because of the short-term rollercoaster ride of the last few months. Down markets are not fun. But each of them has a portfolio ideally suited to their personal comfort level, their time horizon and their life goals. Simply put, they are on the road to Peaceful Wealth.
I wish the same for you.
R. Scott Maxwell is a Vice President and Wealth Management Coach at Talis Advisors, a wealth management firm headquartered in Plano, Texas. He is committed to teaching investors the truth about the stock market. Scott and the team of professionals at Talis Advisors manage beautifully diversified, low cost portfolios for clients throughout the United States, offering independent investment advice based on Nobel Prize winning research with a focus on maximizing returns, maximizing value and maximizing safety to meet client objectives. Scott can be reached at 972-378-1794 or 866-608-2547 or by email at smaxwell@talisadvisors.com. You can also contact him via their less than subtle web site FireYourBroker.net.
