Wednesday, September 14, 2011

Market Behavior

Investing in equities can be difficult. We invest for the long-term but live day to day. It always feels different when volatility and uncertainty take over. Anxious? A little perspective may help. Here are a few principles (and charts) to remember:

#1 – You don’t have to “outsmart” markets to be a successful investor. The following chart shows the average return and duration of bear (down) markets and bull (up) markets within Large US Stocks (S&P 500). Investors will always experience both (bear and bull) markets, but, in general, bull markets last longer and are more profound than bear markets. This creates a successful investment experience for the disciplined investor.

(Click the graphs to enlarge)

Further, this trend persists in Small US Stocks (Russell 2000)…

And Foreign Developed Markets (EAFE Index)…

#2 – You have to stay in your “seat” to be a successful investor. Markets move too fast and unpredictably. Unless you have a “crystal ball”, you should stay in your “seat” (invested). The following chart shows that $1,000 invested in Large US Stocks (S&P 500) in 1970 grew to $49,614 by December 31st 2010 (despite multiple bear markets). However, the same $1,000 only grew to $11,889 if monies were out of the market for the 25 best single days.

You would have to time it perfectly wrong to miss the best 25 days (unrealistic we know) but you get the point. Returns often come in quick surges and missing out can be devastating.

Patience and discipline are rewarded...