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Do Market Swings Scare You?


In the economic marketplace, people love it when they find out something they want has been 'marked down'.   Discounts make all of us feel happy!

 

But, the financial marketplace doesn't seem so rational.  If 'the market' is marked-down, for some reason that's scarey... despite the fact it's been marked down numerous times before and prices always seemed to go back up!

 

Should this be of concern to you?  As the good consultant says:  It depends.

 

If you’re a retiree seeking a dependable income stream, it may actually depend on the size of your asset base.  Those with modest portfolios will likely need some long-term allocation to equities simply to keep pace with inflation, while those with very large portfolios may not have inflation issues to worry about – Let’s face it, Bill Gates isn’t worried about inflation.

 

But, for most us Americans still working in the real world, we’re still trying to grow our assets long-term to provide for a secure future.

 

For those still contributing to their company retirement plans, market swings can actually be your friend!  Unfortunately, too many plan participants seem to be unaware of the opportunities these swings represent since their contributions can buy more shares during the dips and just before markets recover, as they always seem to have done so far.

 

The February issue of Financial Planning contained a chart from ICON Advisors that illustrates economic conditions at various market peaks and the subsequent returns.  Note what happened in SUBSEQUENT periods after the following events.

 

Here’s a brief sampling from the eighteen periods they cited:

 

Surrounding Conditions

Year

Subsequent S&P500

52-week return

Post 1929 Market Crash

1929

-9.9%

Depression Market Bottom

1932

40.3%

Pre-Cuban Missile Crisis

1962

19.2%

Recession Bear Market Bottoms

1970

1974

1982

27.6%

33.5%

19.2%

Post 1987 Market Crash

1987

15.2%

Technology Bubble Break

2000

-12.3%

Recession, Financial Crisis Low

2009

22.6%

European Debt Problems

2010

24.4%

European Debt Problems, Round 2

2011

????

 

As I indicated, ICON’s table included 18 different market conditions.  The best recovery came after the Great Depression market bottom at 40.3%; the worst came after the terrorist attacks in 2001, at -18.9%.

 

Their conclusion:  Using the rear-view mirror to reduce volatility may risk long-term underperformance.  Remember, those who are recognized as America’s most successful investors seem to have one thing in common:  They tune-out the `white noise’ of the media and invest in quality for the long term.

 

The past is nice; but, you can't tell what the future will bring by looking in a rear view mirror.  It does, however, provide a frame of reference.  It tells us simply that the world never has come to an end.   So, it might be safe to assume it won't come to an end this time, either.

 

 

 

Jim

 

 

 

Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

 

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Comment   |  7 years, 2 months ago from Moorpark, CA