In light of recent market conditions some of you may have some concerns about the state of the markets. Here is some information that might help to put things into perspective.
It may shock you but history does repeat itself...
Decade | Market Return | World Events |
1950’s | 12.7% | Korean War, US Seizes Steel Mills, Russia Explodes H-Bomb, Suez Crisis, Recession, Castro Takes over Cuba |
1960’s | 10.0% | JFK Assassinated, Berlin Wall Erected, Cuban Missile Crisis, Vietnam War begins, Mao in China, Newark Race Riots, USS Pueblo Seized |
1970’s | 10.4% | OPEC Crisis, Terrorists at Munich Olympics, Watergate, Largest US trade deficit to date, Steepest market drop in 4 decades, Tangshan Earthquake kills 240,000 people, American hostages in Iran |
1980’s | 12.2% | Interest Rates at all-time high, Worst recession in 40 years(Markets hit new highs following year), AIDS discovered, Black Monday(DOW drops 22.6% in one day) |
1990’s | 10.6% | Y2K, Persian Gulf War, End of Cold War/Berlin Wall Fall, Oklahoma City Bombing, Global Recession, Asian Flu, Mad Cow Disease, Euro introduced |
2000’s | 6.2% (as of Sep 15, 2008) | Tech Bubble burst, Largest market correction in Canada & US since the Great Depression, September 11th, Enron, World Com, Iraq/Afghanistan War, Credit Crunch, Income Trusts, Oil & Gold at record highs, Bear Sterns & Lehman Brothers collapse |
Four things you need to keep in mind about Bear Markets
1. Bear Markets are an essential, immutable, constant element of the economic cycle. Human nature drives the economy, and the economy drives the stock markets. People tend to overshoot and then undershoot the long term growth trends of the economy. This type of behaviour lears to unpredictable returns in the market place which is precisely why markets earn high returns over the long term.
2. Bear Markets are as common as dirt. In the 63 years since the end of WW2 there have been 13 bear markets. There bear markets have averaged a decline of 29% and lasted on average 15 months. On the flop side, bull markets last on averate 26 months and average 71%. I am very confident that the prices we see for common stocks in the market today are low and when the market takes off again, we will never see these prices again.
3. Bear Markets are a temporary interruption of a permanent uptrend. The advance is permanent over the long term and there is over 100 years of data to certify this.
4. Bear Markets are why equity returns are what they are. It is the volatility in the market place caused by investor behaviour which allows people to get weathy over the long term.
How to profit from Bear Markets
This is simple. When things are cheap we should think about buying them. If the price of gas today were at $1.85/L you would likely fill your tank on the way home from work? Even if you only needed half a tank of gas, you would probably buy it. Why...? Because you need gas and it's on sale.
In the same way, you will need money to live during your retirement and the markets are on sale now. Now is a good time to buy. The real question to ask yourself is how much of my retirement did I purchase this year?
The other common misconception is that people feel that somehow, the current correction is different from its predecessors. What we know from historical data is two things. First, when measured against all corrections since the end of Great Depression, the current one would be considered average in size. Second, the prices seen at the bottom of any bear market are always higher than the bottom of the previous bear market. Did you know that the S&P/TSX in Canada was around 7048 in September 2001? Even with yesterdays low, it is still up 42.35% from that time.
Don't let the over-reporting of bear markets by the media steer you away from being a savvy investor.
What is the biggest risk?
Your biggest financial risks are 1)being under-insured, and 2)outliving your money. Consider the impact of inflation for instance. If inflation runs at 3% for the next 30 years it will cost $2.42 to replace a dollar today. If you want to pay yourself $70,000 per year in dollars today that means you will need to be paying youself to be paying yourself $169,900 in 30 years.
Undoubtedly, in markets like these you will meed people, family, and friends who have been left out in the cold during these difficult time by their current advisors. Studies show that 35% of clients do not hear from their advisors when markets go through a correction. If you have found this helpful, please forward this information to your friends and family. Please contact me if you have any questions or would like to discuss your financial plan.
