You Can't Keep The Markets Down

It was nice to see a double digit gain last week rather than what felt like triple digit losses in the past. Even with a week in the win column, the market is still down over 30% year to date. That alone makes my stomach turn. The loss of wealth has affected every risk tolerance level and diversification strategy.

A few well know TV financial analysts have been saying to move everything to cash, run for the hills, this is the next big Depression. This week, James Stewart wrote an article for the Wall Street Journal’s Personal Finance titled “Even the Great Depression Couldn’t Keep Stocks Down.”

Stewart explains that during the Great Depression the S&P 500 fell 86% from September 16, 1929 to June 1, 1932. In September 26, 1930 the market was down 40% one year into its bear market. We are now one year into our current bear market and the S&P is also down 40% from its October 2007 peak. If you bought stocks at this time in 1930, you lost another 40%.

If you had invested $100 in 1928 by the end of 1930, it was worth $98.75. At the end of 1935 it was worth $110.18, a 12% gain. In 1940 during World War II it was worth 107.37, still a 9% gain. If you held on to your investment for 20 years, it was worth $355.60, a 260% gain. During this same time, cash appreciated little and short term treasury’s rose 81% (far cry from 260%).

If you are in the accumulation phase of your life, this is a once in a lifetime opportunity to invest in oversold and undervalued stocks. How do you take advantage of this opportunity? Increase your 401K contributions, open up and or max out your IRA contribution. If you can pick your investments, choose ETFs or index funds and diversify your portfolio in large, mid, small and international stocks. If you want professional advice, stay away from the large brokerage houses and banks; these are not financial experts, their sales associates that sell financial products rather than golf equipment at your local golf store. Instead, seek out a fee only investment advisory firm in your area, and from that list look for the ones that use index or DFA funds.

As for what the TV financial analysts are saying; I am on my fourth week of a no talking head diet! Long term investing to these guys is probably about 1 hour; the length of their show and now my additional time with my wife and two children.

Maintain a diversified portfolio, keep investing cost low and always invest for the long term.

Disclosure: Author holds a long position in IVV

Comments

[Steven Hansen:]

your advise is sound for anyone under 40. it needs modification for people closer to retirement.

2008 Nov 04 04:51 AM

[alancelt:]

This is very misleading. The S&P 500 did not exist in 1928 so I have used the Dow as a substitute. if you bought at the beginning of 1928 the Dow was at 200. By the end of 1930 the Dow was at 170 - a loss of 15%, your $100 would be worth $85. At the end of 1935 the Dow was 140 and your investment $70. It was not until 1850 before the Dow stayed above 200 again. Hardly a great investment. So be careful before taking advice like this.

2008 Nov 04 05:44 AM

[peterthepai...:]

tell this to the japanese...in the long term we are all dead...

read mish

globaleconomicanalysis...

2008 Nov 04 09:15 AM

[Casey Smith:]

Data from the Wall Street Journal article was from the Federal Reserve and should have taken into account dividends.

2008 Nov 04 10:06 AM

[Casey Smith:]

AlanCelt's posting that this is a miss leading article made me dig a little deeper into the rate of returns and where Mr. Stewart got his data. As posted above he mentioned that his data came from the Federal Reserve. In addition to that information I found that S&P 500 pr (price Return) began on 2/29/1928.

Using DOW numbers as AlanCelt did to explain the performance of the S&P does not make a lost of sense to me. I like the sprit of the challenge in that we should never take things a face value. That’s like picking a President based on campaign ads!

Thanks AlanCelt for keeping me honest! And Morningstar for the data!

2008 Nov 04 10:46 AM