My musing on the markets – 21 years later

It’s déjà vu - all over again…

I had only been in the business for 1 year when “Black Monday” hit the markets…

I thought that the world was coming to an end…as did some of my clients at the time!

I had had no experience with market downturns before and so continued (fortunately) to counsel my clients to “hang in there”…

As you may recall, on Monday, October 19, 1987—now known as Black Monday—the Toronto Stock Exchange 300 Composite Index (TSE 300) dropped 407.20 points that day to close at 3,191.38—losing 11.3% of its value.

In the United States, the Dow Jones Industrial Average tumbled 508 points to close at 1739 - losing 22.6% on Black Monday alone.

Now, fast forward 21 years…

I have been through all this stuff before – and I am older (unfortunately) but wiser (fortunately)…

Still, on Monday, September, 15, 2008 – the Toronto’s S&P/TSX composite index (TSX) dropped 515 points that day to close at 12,254.32 losing 4% of its value.

On the same day in the United States, the Dow Jones Industrial Average tumbled 504 points closing at 10,918 losing 4% of its value.

The TSX’s drop on September 15, 2008 was 100 points less than that of October, 1987 yet the index only gave up 4% vs. 1987’s 11%.

For the Dow, it had almost exactly the same point drop as October, 1987 – however, the index only lost 4% rather than 22%! In other words, it lost 5 times less than the magnitude of the loss in 1987.

So do you see what these numbers are telling us?

That both the TSX and the Dow stock market indexes have increased so much in value over the past 21 years – that a 400-500 one day point does not slice off as much shareholder value as it once did…

Did you know that?

Here is what is really interesting…

Over the past 21 years, the TSX composite index has grown in value from 3,191 to 12,254. A gain of 9,063 points or 284%!

And

Over the past 21 years, the Dow Jones Industrial Average index has grown in value from 1,739 to 10,918. A gain of 9,179 points or 528%!

Also, during this time frame – among other things, the markets have had to digest and deal with the news of:

1990: Iraq Invades Kuwait
1994: The Mexican Peso Crisis
1997: Asian Currency Crisis
1998: Russian Debt Default
2001: September, 11 – Attack on New York’s World Trade Centre

Each of these was a huge event at the time.

Yet, we’ve seen markets recover from each of them, sometimes more quickly than many anticipated. Of course, there’s nothing to say that what we’ve seen in the past will always repeat itself in the future. But, generally speaking, that is what happens.

What’s the worst scenario?

Three or four months until a market bounce back isn’t unusual after some major setback.

In fact, it took only two years for the Dow to recover completely; by September of 1989, the market had regained all of the value it had lost in the ‘87 “crash”.

So, in spite of all the events that have shaped our world and affected our stock markets in the past 21 years – the amount of time that I have been in the financial services industry:

$1,000 invested in the TSX over the past 21 years would be worth: $10,336 for a profit of $9,336.

And

$1,000 invested in the Dow over the past 21 years would be worth: $14,727 for a profit of $13,727.

When the market tumbles, the pain of the resulting losses compounds investors’ overreaction: the injured just want to stop the bleeding. The problem, of course, is that pulling your money out on such a willy-nilly basis leaves you vulnerable to a different sort of pain — the bellyache you’ll feel when stock prices bounce back.

If only we had the foresight to sell before every market downdraft and then get back in just as the good times roll again. But that’s tough to do.

Missing just a few good days of performance can significantly reduce your overall returns…the longer you hold an investment, the less volatile it actually becomes…

For instance, someone who missed the 30 best days on the S&P/TSX from August 2002 to March 2008 would have been left with only slightly more than they began with ($10,489, compared with $10,000 originally invested, for example). Staying invested over the entire period would have resulted in more than twice that amount, $22,950.

Wouldn’t you be better off missing the equivalent down days?

Of course!

Which ones did you have in mind?

Given that both big up and down days represent less than 1% of the days considered in the average market, the odds against successful market timing are staggering. Its right up there with winning the lottery!

Sure, things look bad and only the cheeriest of optimists think that North America isn’t in recession. But these economic setbacks don’t last forever.

In nine of the past 10 recessionary periods, stocks bottomed about halfway through the actual economic downturns.

The only exception was in October 2002, when shares hit their lows nearly one year after the 2001 recession officially ended - and it’s fair to assume that the September 11 terrorist attacks made a very big difference in that instance.

What was the average duration of these 10 recessions? 10.4 months.

That doesn’t seem that long to wait…and don’t forget that you are not invested in the broad indexes!

Your portfolio will have various and different elements or asset classes working for you.

These each will be going through their own individual cycles.

This gives your portfolio a much calmer ride…yes, less returns than the broad stock market indexes in great years – but, preserving the value of the portfolio in lousy years…

For a more in depth analysis of the markets in historical context, read what I wrote recently here at:

http://www.howtobesetforlife.com/articles/the-andex-chart-what-it-means-to-you-and-me/

Remember, markets don’t lose us money – it’s our reaction to the markets that lose us money!

So – don’t worry – be happy!

Enjoy life!

It’s a great one!

This conversation is missing YOUR voice…Take a few moments and let us know what you think!

Highlighted fields are required.
Your Name:
Your Email:
2 + 2 =
Your Website:
Your Subject:
Your Message:
	Copy yourself on the form submission.