Is it different this time?
Monday, October 6th, 2008Since the capital markets affect your ability to get and remain financial healthy and stable, it’s important to garner an understand of just what is going on right now with the economic crisis and corresponding bear market we’re in.
In every bear market, someone states it’s different this time, causing more fear, more skepticism, more pessimism. But is it really different this time?
- This is the 10th bear market in US stocks over the last fifty years (on average one of every 5 years we’ll see a bear market, In this case we went 6 years roughly from bear market to bear market)
- A bear market is typically described as a peak to trough decline of 15% or more in the S&P 500
- How does the current downturn compare to those in the past? Right about in the middle by all statistical measures
- The peak was 10/29/07, and through 9/22/08 (11 months) we’ve lost 22.9% of the S&P’s value
- Ranked by the size or duration of this decline, it ranks 6th among the 10 most recent bear markets
Not to downplay the anxiety most investors are feeling, but there really isn’t much significant (statistically speaking) from this bear market to those over the past 50 years.
Here’s a cover story from 1970 – the worst bear market since the 1930′s and many financial firms went under during this period. These were scary times to be certain:
The one consistent theme during times like these are the capital markets resilience both at home and abroad. Capital markets adjust prices according to current events.
Here’s another cover story from 1974:
46% of adults feared depression similar to the 1930′s. The interesting part is many times these stories make headlines it’s NOT uncommon that the worst has already past. This issue of Time was dated 9/9/74, the DOW had ALREADY reached it’s low, and the S&P 500 was just a few weeks away from it’s low on 10/3/74.
Here’s another one from Time in 1987:
This headline hit just a few weeks away from the market low on December 4, 87. The popular press always reports it’s “different” this time, and somehow things will NEVER be the same again. But risk and return are related – that’s the core belief I follow with investment planning. And if they are related then nothing really was different at all! There were different PRICES people were willing to pay for a security, but the fundamental system remained unchanged.
In 1990 when this article had been released, the market bottom had ALREADY been reached! Definitely a stressful time however, like it is today:
Don’t those headlines sound familiar?
In 1998 we had been conditioned to believe that a buy and hold strategy made sense much of the time, but conditions were so bad and the world was falling apart, it just didn’t make sense this time:
The consensus then was NO RATIONAL PERSON WOULD REMAIN INVESTED IN THESE MARKETS. These were UNPRECEDENTED events like we had NEVER SEEN! That headline rung true with nearly every financial publication.
I remember 1998, I had been a financial advisor with Morgan Stanley for 3 years at that point. I remember thinking the markets as we know them would cease to be the same forever. The media had clients conditioned to think the same. I didn’t have the experience at that point to realize we were simply in a statically normal down market cycle, yet my gut told me to stay the course. I tried to have every client stay the course as well, rebalance, and broadly diversify. Many clients did, a few didn’t – they were the ones caught up in the “it’s different this time” mentality of fear!
Those staying the course looked fine a few months later. In this particular case, in extremely rapid fashion the financial hurricane disappeared, and just a few months later investors with short term memory moved on to cocktail party stories of just how much money they had made trading tech stocks the prior week!
Here’s another headline from Fortune in 1998:
Once again from Fortune Magazine in 1998 – THIS TIME IT’S DIFFERENT! If ANYTHING was different, it was how QUICKLY the markets recovered, not how long they were in decline!
Another from Fortune in October of 1998 – Could the financials survive?
Don’t those headlines look similar to the ones we’re seeing today?
This particular investment manager in a publication called “Investment Outlook” was and is extremely well known and respected still today. In September 2002, ONLY A MATTER OF DAYS BEFORE THE MARKET BOTTOMED on OCTOBER 9th, 2002, this manager stated stock prices were NOWHERE near bottom, and DRAMATICALLY overpriced. He said we should expect another 25%+ drop in the Dow before we see a buying opportunity:
When we talk about resilience, we’ve had many examples of resilience! We have had an oil crisis before:
Yet we managed to find our way and readjust to the crisis…
Check out Business Week in 1979:
We’ve had periods where inflation was the primary concern, and for long periods of time! In this situation, treasury bills outperformed equities for several years.
Or how about the highest interest rates in 150 years?
And further on the topic of resilience, don’t forget the CATASTROPHE’s that are SUPPOSED to appear, that often times fail to happen and become nothing more than a blip on the radar screen:
More recently, I had a client who was convinced the world’s population would be dessimated by the bird flue predictions a couple years back. He bought gas masks and stockpiled food. Many people were concerned… the doctors all said it wasn’t a question of IF, but WHEN, and it meant POTENTIAL DESTRUCTION of the world population!
Yet, there is one word to describe this panic and how it played out as well – Resilience!
Other events are completely unpredictable, and much harder to forget:
The markets reopened days later to staggering losses, yet business still functioned and the economy still moved ahead.
Remember how the SARS virus was not going away and had implications of completely bankrupting the ENTIRE GLOBAL TRAVEL INDUSTRY?
Yet somehow we managed to readjust and move forward…
During all of these headlines and major market events, it may have been possible to add value and avoid the downturns, jumping in at or near the bottom to ride the wave back up – boy, wouldn’t that be nice? Yet time and time again the concept of timing the market and adding value by shifting in and out has proved ineffective AND detrimental:
In case after case after case we find that NOT ONLY individual investors fail to successfully carry out the timing strategy, but the “smartest” and “most experienced” market professionals are NO BETTER! In 1991 the market EXPLODED with a huge rally after the missile strike in Iraq – yet most investors, and most professionals, missed it expecting the opposite to occur.
Investment professionals, individual investors, and the like – cannot reliably outperform the market using market timing strategies. There is always however going to be the exception to the rule, which is pure and simple LUCK. Statistically, someone will get lucky and think it was genious rather than chance! I learned that in Statistics 101 (or whatever the course name was roughly 15 years ago). Pure and simple – statistics says that if a thousand people try to beat the market and time it to avoid losses and enjoy the gains – a few of them will succeed due simply to random chance, or statistical probability! In fact it’s not really possible that a few wouldn’t be lucky enough to time the markets for some given period of time – it’s just impossible to predict who the lucky ones will be!
If only we had a crystal ball…
And doesn’t this look familiar? Falling real estate prices and banking difficulties? This is from 1991, could have been printed yesterday!
This guy was left scratching his head trying to figure out why his forecast for the markets that year had been so terribly wrong! If you would have gotten scared out of the markets reading the headlines then you would have missed all or a good portion of the 1990′s, one of the biggest bull market runs in history! Or at best, you would have missed a portion of returns if you would have jumped back in at higher prices…
AND THE BASIC PROBLEM WITH TRYING TO ADJUST YOUR PORTFOLIO IS MARKETS ARE PURELY UNPREDICTABLE! In many cases, they explode UP or DOWN for no particular reason or on no specific news:
This particular series of events was in mid-October 2002 following the market low on October 9th and it was one of the largest stock market rallies in HISTORY! This exhibits the fundamental problem with market timing – you have to be right TWICE! When to SELL, and when to BUY BACK IN!
In this example, investors rushed OUT of stocks at the LOWEST POINT IN 2003 buying fixed income funds at incredibly low yields:
Talk about HORRIFIC TIMING for the masses! Can you imagine missing the market returns of 2003, 2004, 2005, and 2006?
And what about global conditions? We can always find reasons NOT TO INVEST, now is always the hardest time TO INVEST!
WHAT HAPPENED? THEY OUTPERFORMEND THE US MARKETS OVER THE LAST 10 YEARS!
And who would want to invest in France – every time you turn around they’re on strike!
WHAT HAPPENED? THEY OUTPERFORMEND THE US MARKETS OVER THE LAST 10 YEARS!
And of course Japan learches from one crisis to another, specifically over the last 10 years!
WHAT HAPPENED? THEY OUTPERFORMEND THE US MARKETS OVER THE LAST 10 YEARS!
The Aussie dollar at one point was outperformed only by the Turkish lira in terms of foreign currencies:
WHAT HAPPENED? THEY OUTPERFORMEND THE US MARKETS OVER THE LAST 10 YEARS!
And let’s not forget about South Korea and other emerging markets, you couldn’t run fast enough to hit the door:
WHAT HAPPENED? THEY OUTPERFORMEND THE US MARKETS OVER THE LAST 10 YEARS!
Also out of India after a political crisis:
WHAT HAPPENED? THEY OUTPERFORMEND THE US MARKETS OVER THE LAST 10 YEARS!
Brazil at one point looked like a complete train wreck:
WHAT HAPPENED? THEY OUTPERFORMEND THE US MARKETS OVER THE LAST 10 YEARS!
And let’s not forget about Malaysia:
Malaysia SHOCKED the markets with one of the largest drops in emerging markets in recent history! WHAT HAPPENED? THEY OUTPERFORMEND THE US MARKETS OVER THE LAST 10 YEARS!
In recent days we’ve seen multiple financial firms on the brink of collapse. Clearly there are many things to worry about, many things to be concerned about, and extreme pessimism for the future. Real estate losses, oil prices, inflation, an economic slowdown of global proportions, It’s POSSIBLE these concerns may be of greater magnitude than any of us have seen in many years, or perhaps ever…
So what should investors do in times like these?
Some might say that recent events are SO UNPRECEDENTED, that they call into wisdom the strategy of maintaining any long term equity market investments. NOTHING COULD BE FURTHER FROM THE TRUTH!
Rather, Recent events offer a ringing endoresement of broad diversification and an consistent investment strategy as the best way to deal with uncertainty. In this tumultuous year, many individual investors – specifically employees with large positions in company stock, those that didn’t diversify, those that THOUGHT they were diversified, those that made sector bets – suffered catastrophic losses. We’ve seen a significant number of professional investors turn a bad year into something far worse by making big bets that went the wrong way! A diversified equity strategy, balanced with solid and short to intermediate term fixed income components, may not be a money maker in a bear market, but it sure beats the alternative.
Investing is NEVER a sure thing – but the risks (for broadly diversified low cost low transaction portfolios moderated with short to intermediate term high quality fixed income investments) are reduced over long periods of time. I don’t know any clients who have less than a 5 year window to remain invested, and nearly every client has multiple five year rolling periods to ride out the bear markets.
Investing is never a sure thing, to be sure. But when we 1) eliminate unnecessary risks (concentrated stock exposure, lack of diversification, an improperly balanced portfolio, an overly aggressive portfolio), when we 2) reduce to the greatest extent possible the unnecessary costs (excessive fees, commissions, trading costs, transaction costs, hiddent management fees and other expenses associated with the commission brokerage world), and when we 3) access the worlds capital markets to put ingenuity and resourcefulness across thousands of companies to develop new ideas, new technologies, and new products – we harness powerful forces to work on the investors behalf and put the odds of success in our favor!