Wednesday, April 7, 2010

All Indicators Point to Investing Now

Success in investing begins by identifying and accepting key financial facts:
  • The Standard & Poor’s 500-stock index bottomed at 666 on an intraday basis on March 6, 2009. Since then, it has rebounded more than 68%. On a closing basis, the S&P bottomed at 676.53 on March 9, 2009.
  • There’s ample liquidity to push stock prices higher. Money has been pouring into savings deposits, with yields close to zero and will likely remain that low through year-end.
  • Corporate cash is soaring. It rose to 1.52 trillion during 2009’s third quarter. Among the most aggressive buyers of stocks recently have been companies buying other companies --- for cash.
  • Corporate earnings should continue to rebound; and, some Wall Street analysts predict the S&P 500 companies will earn almost $100 a share in 2011, up more than 20% from 2010’s estimate.
  • The upturn in the profit cycle should revive employment and capital spending because the correlation is very strong between the yearly change in the S&P earnings and yearly growth of the index Coincident Economic Indicators.
  • Productivity is growing rapidly and making new highs, suggesting real pay per worker will continue to do the same.
  • The global boom, which started in the early 1990’s, is staging a comeback, with the worldwide economy clearly recovering at a solid pace.
  • The sovereign debt crises around the world should force Governments toward greater fiscal discipline.
  • A major change in Congress is expected this year that should result in a more fiscally conservative legislature.
History shows how rapidly a market can change direction, and the benefits of staying the course.

If you want to see proof of this visually, I will show you in the form of two graphs.

The first graph is the one-year total returns for the Standard & Poor’s 500 Composite Index from 1926 until 2009. The S&P 500 is an unmanaged group of securities and is considered to be representative of the stock market in general. If you look at the graph, every year is represented by a blue box or red box – the blue box signifying a positive year and the red box signifying a negative year. As you can see by the graph, over the 84 year period there were 24 negative years and 60 positive years. If you watch your investment on a year by year basis, it could drive you crazy. One year doesn’t tell you much because the market jumps around so much every year. As a matter of fact, after declining 37% in 2008, the S&P 500 advanced 26% in 2009. Just imagine how awful those people that took their money out in 2008 felt after seeing the rebound in 2009!

By the way the S&P 500’s average rate of return for this 84 year period was 11.84%.

Now let’s look at what the stock market actually did for the same time period in ten year chunks. Each number represents the end of a 10 year period. So, since we were starting in 1926, the first decade will start at 1936. 1937 signifies the period from 1927 – 1937 and so on and so forth. As you can see by the graph there were only 4 negative decades and 75 positive decades. Even though you can see that 2009 was one of the negative decades, you can definitely see the rebound at the end of 2009 and into the first quarter of 2010. Being cautiously optimistic leads me to believe we are in for some good times ahead.

During the 79 decades period the S&P 500’s average rate of return was 10.76%.

To me it looks like all indicators are pointing to investing now. However, when thinking about your investments think long term and ride out those year-to-year waves. In the prophetic words of Warren E. Buffett, “Realize that the market always comes back.”

I'm so excited to share this information with you. If you have enjoyed the information or feel that it would benefit someone else, please share it. If you have any questions or comments, please feel free to contact me.
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