We have all heard about the stock market’s “Lost Decade,” and the nightly news likes to tell us whenever possible if there is bad news in relation to the stock market. Natural disasters, confl ict in the Middle East, political scandal, economic uncertainty, may have you wanting to wait for calmer times to invest. All this bad press had many investors running from the equities markets, but the problem is - the “Lost Decade” is only referring to one stock index, the Standard & Poor’s 500 (S&P 500) index. The S&P 500 index includes the 500 largest U.S. companies only. So while the problems of today may seem unprecedented, we have faced similar challenges in the past.
So, how about some reminders from our past?
• The Oil Embargo in 1973 saw the S&P 500 drop 48.20% from Jan. 1973 – Oct. 1974. The 5 year period average return for the S&P 500 after that was a positive 17.39%.
• “Black Monday” in 1987 saw the S&P 500 drop 20.4% in one day. The 5 year period average return for the S&P 500 after that was a positive 17.97%.
• How about the technology bubble burst in 2000, when we saw the S&P 500 drop 49.15% from Mar. 2000 – Oct. 2002? The S&P 500 5 year period average return after that was a positive 17.14%.
Again, this is all one index, the S&P 500. What if we stuck to our guns and remained in a diversifi ed portfolio of stocks and bonds, and also had some international and emerging market exposure? If we look at the chart we can see that yes, the S&P 500 was down for the decade, however, if we were diversifi ed we would have actually ended up having a positive return during the “Lost Decade.” I like to use the 4-cylinder car example when meeting with my customers. That is, in a 4-cylinder car, not all 4-cylinders can be at the top at the same time or at the bottom at the same time, the car won’t run. Yet, if all 4-cylinders are working together it doesn’t matter to us which cylinder is on top or bottom, we need them all working together to make the car run down the road. To me the 4-cylinders are; stocks, bonds, international and emerging markets. We need all the diversifi ed pieces to make the car run down the road for us.
If anything, the market drop in 2008 reminded us to take care of our investments (our cars). It was a good reminder for us to make sure our risk tolerance is matching the investments we hold, and the time horizon for which we plan to hold them. It also reminded us how diversification and allocation are important pieces to helping our individual cars run. The past has shown the stock market has had large declines, and we will have them again in the future. However, the past, while no guarantee, has also shown us that the periods after these declines offers us great opportunities for growth. Stay calm, stay invested, and be diversified.
If you haven’t done so already, meet with your Personal Banker for your free review. Let us help you evaluate what you have and what may be appropriate based on your individual needs, time horizon, and risk tolerance - so that we can keep your car (investments) running down the road at the appropriate speed for you.