History Says That We'll Be Fine

This is not a time to panic and sell out of all your investments.

In every downturn economy, people start to predict the end. Irrational investing takes hold of your portfolio and the consequence is buying high and selling low. Why is it that in the last quarter century - we've seen 124 different banking crises throughout the world and every single one of them we have bounced back? Why do we not learn from history?

There have been five major declines in the Dow Jones in the last thirty years or so. I did a quick analysis as to how bad and how long they were. I ignored some of the minor drops such as the savings and loan crisis and the Asian financial crisis spillover into US markets. But these are the five I've highlighted:

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January 1973 - October 1974: a 57% decline in 21 months
September 24, 1976, a near full recovery in 3.5 years

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Recession of August 1987 - December 1987: a devastating 35% decline in only 105 days
September 1989 - a full recovery in 21 months

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9/11 - a 21% drop in only 28 days, mostly in the days surrounding September 11.
January 2002 - a near full recovery in 105 days

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Dot.com crisis: March 2002 (the post 9/11 high) - September 2002: a 29% drop in 173 days
January 2004 - a full recovery in 15 months

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October 2007 - Friday's close - a 40% decline in twelve months
A full recovery…. ?

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I'd like to point out that in 1973, 1987, September 11, 2001 and 2002, every industry analyst and expert, every trader, every economist, and every investor was screaming bloody murder. Everyone was predicting the fall of America in each one of these time periods. Everyone was talking about keeping your money under your mattress and how it's not safe out there. But in each one of these historical crises, a full recovery was seen in merely a few years.

History will prove itself. This is a classic recession - a period of market correction accompanied with stagnant GDP growth and inflation, along with rising unemployment. This is likely going to be just as bad as 1987, perhaps slightly worse. In addition, the fundamental economics of this country are slightly flawed in a way which might prevent a quick recovery. But one thing is for sure - we will be fine.

He who has cash today is king. If you do have cash - I advise starting to dollar cost average and buy back into the market steadily. I've already called up a few of my mutual funds and started making automatic deposits once again. And if you're smart, you'll boost your 401k contributions as well, even if its just for a few months. Ten years from now your new wealthy self will thank you. All markets need correction time - its classic supply and demand and economic analysis. So I suggest to the world - let the overvalued global markets correct themselves - and let it play out.

You'll be fine, I promise.

Comments

[Smarty_Pants:]

1929: Dropped 89% Time to recover: 21 Years

Let's not be lazy.

2008 Oct 13 07:22 AM

[a. palmer jr.:]

I think I'll stay out of mutual funds, thank you.

2008 Oct 13 08:21 AM

[johnhaskell:]

if you bought the Dow at 1000 in 1966 you suffered a 75% inflation adjusted loss by 1982. But by 1994 the Dow was above 4000 so you were back to even (pretax). Sounds great!

2008 Oct 13 10:56 AM

[henarl:]

You have completely ignored inflation in your calculations.

2008 Oct 13 01:09 PM

[Muzie:]

Amazingly the commenters unknowingly reaffirm the author's arguments: "Everyone was predicting the fall of America in each one of these time periods.".

Is everyone so blind to not realize that all the bears are now left cherry-picking very specific examples to support their case? Like Haskell over here, picking this one period of no returns - and failing to mention a position in cash from 1966-1994 would have given an inflation-adjusted LOSS.

The national sport is now to compare this with what is now the ONLY worst stock market crash in history, the great depression. And somehow nobody sees how for this one case there are the 99% of other cases where did NOT go down in flames.

Thanks to the author - it's a welcome commentary. I've been short or out of US equities most of the year thankfully, but I wouldn't go as far as try to rely on the downfall of the US to try to support my investment case here.

To the other commenters: the choice is yours. You can either participate in this economy and produce meaningful economic output by working and invest in its talent.

Or you can sit aside, put 100% of your productive capacity in a completely non-productive asset such as gold, and step aside with your arms crossed with the hope the world burns. Just keep in mind the reason we are in this mess is because we allocated two much of our productive GDP to non-productive levered assets (real estate). Gold isn't any better. You are part of the problem, not the solution.

2008 Oct 13 02:33 PM

[basehitz:]

Muzie said it well. The hysteria from the media and other talking heads was overwhelming. AAII survey has the most pessimistic outlook ever. VIX readings are off the chart. It seems almost everyone is sure this is THE end. ANd they love to compare this to the great depression. THose who wonder if this could happen should pay close attention to corrective action taken around the globe and CONTRAST that to policies from the great depression. Reasoned commentary notes back then, policy mistakes turned a bad situation into a catastrophy. And they note how very different things are today.

I started buying when VIX hit 50 and bears dominated per AAII. That's historically been a successful buy signal. But this selloff set new records so I was early. But I bought mostly technology based on trough valuation levels from Oct 2002 adjusted for differences in fundamentals today. From Ocgt 2002 the weak ones doubled, the stronger ones were 3- and 4-baggers. I like those odds.

One more critical point. No investment is considered unless the balance sheet is stellar and it is cash flow positive or very close. I don't want a GM where you wonder if recovery will come before they burn through their cash.

2008 Oct 13 03:33 PM

[ali k:]

What great comments! If you buy everything on one day - you're trading based on market timing - which is a foolish thing to do. Don't buy everything in 1966's high - on the contrary - buy very regularly all the way up, and then all the way down, and sure enough - all the way back up again. And as far as comparing this badly needed correction to the 1929 era where there were no checks and balances and 25% of the nation was unemployed - let's just say its an unfair comparison. Even if this were to be the worst recession ever, it'll never have the effects of 1929 because we've protected ourselves better than the 20s decade.

It'll be bad - that's for sure. Stop trying to time the market mania. If you're not retiring tomorrow and a patient investor, keep your head up and keep throwing more cash in. Thanks for the comments.

2008 Oct 13 06:56 PM

[fnu149:]

I think too many of us are focusing the past to predict what will happen in the future. I believe pass recessions and booms are unique during their times. For example, the internet bubble was due to irrational hope that all technological companies will be profitable. Those were nonsense. The internet crash was very extreme, and this is why almost after 8 years, you still don't see the Nasdaq fully recovers to the 5000 point range. During that time, I believe the internet crash was some what limited in its influence on the overall economy. It really didn't affect a majority of the American citizens. Nevertheless, it was not as global anyway.

This time, the financial crisis is actually not limited to the financial companies. I think it makes more sense to believe that the crisis has a lot more reach, and therefore should be more severe and long lasting. This bubble has created a false sense of wealthiness. For the past 20 years, how much growth in the economy was actually engineered by borrowed funds instead of real spending power? If your financial leverage has now being drastically diminished, can the economy really keep up the growth. For the United states, this means that you are expecting the Americans to still spend more than previous years. In order for us to recover, you have to believe that the American spending habits will only temporarily weakens, and then pick up the steam later. However, if you believe the American spending habits will weaken for a prolong period, then simply put it, we won't recover soon.

To gain knowledge and insight, I believe all of us should spend time in seeing what is happening around us at the current moment. Don't just always look back at pass incidents.

2008 Oct 13 08:43 PM

[Money Penny:]

People making arguments for 1929 drop (and 21yrs for recovery) forget that conditions were different. I do not see WW III anywhere ? So I agree with author, we will be just fine. Sky is still not falling. Prudent and smart investors will come out unscratched, perhaps happy.

Remember for every sell, there is somebody buying out there !! Think why the buyer is putting money in ?

2008 Oct 14 01:11 PM

[mr.verymuch:]

you promise? how comforting

2008 Oct 14 06:18 PM