Monday, November 15, 2010

Tremendous Growth After Steep Market Declines – Is History Repeating?

Billionaire Warren Buffet has a motto that he lives by when he is investing: “I’m fearful when others are greedy and greedy when others are fearful.” He explains that “most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”

If only most investors could follow suit. There are statistics that show that during the 20-year period ending 12/31/2009, if an equity investor just stayed invested, based on the S&P 500 Index, they would have had an average annual total return of 8.20%. Most investors during this time period however, only got an average return of 3.17%. That’s because a lot of investors got into the market when things were going well and got out when it wasn’t.

No one can predict the future; however a lot of investors try to time the market, by trying to get in and out at the perfect times. But did you know that had you invested a hypothetical $10,000 in the S&P 500 excluding dividends, from 10/3/1974 – 10/3/1984, the 10-year period after the 1/11/1973 – 10/3/1974 market decline of 48.2%, you would have made an average annual price return of 10.06% and your investment would have grown to $26,082?

Here’s what would have happened if you missed out on any of the best days in the market over those 10 years due to being out of the market:
  • If during that time you missed out on just the 10 best days you would have missed out on 51.6% of the price return and your investment would have grown to $17,781.
  • If you missed out on the 20 best days you would have missed out on 78.4% of the price return and your investment would have grown to $13, 478.
  • If you missed out on the 30 best days you would have missed out on 96.3% of the price return and your investment would be worth $10, 594.
  • If you missed out on the 40 best days you would have actually lost 15.0% in value and your investment would have be worth only $8,495.
Wise investors are in the market for the long term and love market fluctuations because they understand that when the market is low, a given amount of invested money buys more shares – then when the market goes up, the investment grows. Warren Buffet says “realize that the market always comes back.”

Talking about how the market always comes back, did you know that since the early 1930’s (including the great depression until the latest housing market crash between 2007 and 2009) there has been seventeen major declines of about 15% or more in the S&P 500? And while the markets fluctuated after the declines, the declines were often followed by meaningful recoveries.

As a matter of fact, the average annual total return for the five-year periods after each decline was positive 100% of the time and a hypothetical $10,000 investment in the S&P 500 would have as least doubled 12 out of 16 times! The average annual total return for the 5-year period after a decline has been 18.95%. There hasn’t been 5 years of data since the latest decline from 10/9/2007 – 3/9/2009 where the market declined 56.78%, but the first year after the decline has already produced an annual return of 72.28%!

Could it be history repeating itself again?

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.
Post a Comment