3 Questions Investors Are Asking

Over the past few months many investors have been questioning their methods of building wealth for the future. With the markets being more volatile than at any time in history, there is no doubt that many people simply feel like running for the exits.

With that in mind, here are three questions that many investors are asking along with answers based on historical statistical evidence.

Why am I still investing in the U.S.?
The message that history has taught us is a simple one. Analysis shows that in the past, when the S&P 500 was trading below fair value and inflation was less than 4.2% which is certainly the case today, there is an 83.3% chance of achieving a positive return.

All the signs and tools that we have to work with indicate that coming out of this crisis there will be significant upside in the U.S. equity market.

How can I keep investing when the economy is in the tank?
This one is easy, stock markets are leading indicators and as such stock markets will likely recover before the ensuing economic recovery. While it is impossible to identify when these recoveries will begin, missing out on the sharp returns that often occur in the early stages of a stock market recovery, is a mistake that investors make very frequently.

How am I ever going to bounce back?
We must remind ourselves that, as a long term investor, it is important to continue to follow the forward looking strategy that was implemented before they felt the emotional pressure of daily market volatility. A very compelling fact to reference is the asymmetrical nature of bull markets vs. bear markets.

The average bull market gain of 79% far outweighs the average bear market decline of 28%. And the length of the average bull market is 34 months long vs. the length of the average bear market of only 11 months.

While these questions are not intended to completely sooth anyone’s concerns about the health of thier portfolio, it is always nice to know what history has shown. Even though history cannot predict the future, it is the best information that we have to qualify our decisions with.

Comments

[Jim Hawthorne:]

First of all, Tyler, you assume (a dangerous habit unless you pair it off with some prudent risk-management) that market behavior and returns of this century will mirror those of the last. I would question this assumption, and so should you and your readers on these grounds:
1. The 20th Century was kind to America and the NA markets; after all, we were pretty much the last man standing at the conclusion of WWII. We had a fantastic opportunity for growth in the second half of the past century that is NOT guaranteed in this century.
2. The current market has torn the current understanding of value to sheds, Tyler. While many of the talking heads blabber on about market bottoms and undervaluation and great opportunities, those who take their (and your) advice continue to get slaughtered.
3. I do agree that history can teach us much. Study the history of the markets since March 2000 and you will have a terrible time convincing anyone why they should stupidly suffer through bear markets waiting and hoping for a turnaround while the game has changed so much since the roaring 1900's!

You are living through the most serious bear market of the last 55 years, and you refuse to learn a single thing!

Jan 15 11:58 AM

[blu:]

It's just a few more days until the Messiah will be sworn in.
The media will be stumbling all over itself to espouse His greatness and start pumping up the economy psychologically.

Just as they continue to spew doom and gloom now, they will soon start telling us it is getting better and better. And the masses (perhaps not investors) will swoon with delight and turn this economy around.
;)

Jan 15 12:09 PM

[Larry House:]

Even better than reading history is reading the present. When one hasn't lived much history, one can rely too much on book history. That is dangerous right now. History tells us nothing unless right now is JUST like what has happened before. Does anyone really believe that? If you are going to err make it on the side of caution.

Jan 15 12:16 PM

[Steven Hansen:]

Tyler,

my three questions as an investor:
1) all investments go up and down. why would i listen to somebody who always says it is the time to buy - and never a time to sell?

2) i am not running to the exits, i am standing in the street watching buildings collapse during an earthquake. the building has bad cracks in it. why would i come inside just because things in the building are selling at a cheaper price right now?

3) an economic event is occurring which incomparable to past events, and the remedies are incomparable to past economic events. how can i understand what part of history will be relevant to today's situation?

Jan 16 12:49 AM