WELCOME TO THE "REAL" STOCK MARKET
Get Educated...or Suffer
(Part 3 of 3)
Today, we conclude our three-part series on a topic we feel is vital for any investor or financial advisor to understand. If you missed parts one or two, let us know by replying to this email, and we'll send it to you.
To summarize the key point of this series:
The 1980-2000 period was not merely the most unrelenting rise in stock prices we've seen in the past century...it was the only one!!! Large market swings are a bigger part of history than most of today's investors realize. If you simply recognize and acknowledge that the stock market's character is not what most people think it is, and set your strategy to accommodate that, you open the door to an ocean of opportunity. At the same time, you can in turn potentially use the stock market as a long-term risk-reduction tool!
Here is a quick review of the chronology of the five 20-year periods charted on stockcharts.com, which will help you see why the historical evidence is overwhelmingly on our side of this debate (if there even is a debate).
1900-1920: the Dow went from 47 to 57, dropped to 31, rocketed to 75, was cut in half to 39, returned to near old highs at 73, fell to 53, rose to 69, dropped back down to 52, catapulted to 110, and crashed again to 66. This all happened in an 18 year period. Are you dizzy yet? If so, see the chart and you will get this at a glance. The point is that in this period (and as we will see, in most others), stock market investing is a series of bull (up) and bear (down) markets, and sometimes over the "long-term" they lead to nowhere.
Look back at the numbers above: the Dow was at 57 in 1901, and in 1918 it had only advanced to 66 (yet there was so much money to be made in between). Do NOT mistake this as a case for trading the stock market, but rather as a very strong case for having a deep toolbox to use to defend and take advantage of a wider variety of markets than the homogeneous period of 1980-2000.
Finally, here is a summary of the Dow's path over the succeeding 20-year periods. Again, stockcharts.com allows you to visualize this in seconds, but seeing the numbers here gives you an appreciation for the consistency of the evidence which supports what we believe in. We'll simply write the consecutive highs and lows in the Dow over each 20-year period.
1920-1940:
64...381 (not a typo!)...199...294...86...117...41 (again, not a typo)...80...50...194...99
1940-1960:
112...138...93...212...163...193...161...521...420 (i.e., stock market = Coney Island "Cyclone" roller coaster ride)
1960-1980:
735...995...744...985...631...1051...577...1014...742 (talk about running out of gas!).
1980-2000:
786...1004...808...1276...1105...2663...2442...9063 (yes, that would be your 1990s!)...7539
Are you still thinking that maybe this is all some statistical mumbo-jumbo? That it does not account for the world we live in today. One need only look at two current facts about the stock market today, in order to see that we have a point here: from 2000-2008, the Dow has traded between about 7,600 and 14,000. Today it's just under 9000. My kids may tell me "that's wacked, dad." My response: no, kids, that's opportunity, as long as you have a tested, strategic approach to take advantage of it. Of course, they would have tuned me out after "no, kids..." But you don't have to. You can incorporate lower-volatility investment styles, use cash more strategically in portfolios, break your portfolios into sub-portfolios with varying time horizons (e.g. 3 years for this portion of the total, 5 years for that, 10 years for that, etc.) and make all of this work in your favor.
I've never quoted and paraphrased Kipling before (though I have read Kiplinger's...does that count?), but here goes:
If you can keep your head when all about you
Are losing theirs...
If you can trust yourself when all men doubt you,
But make allowance for their doubting too...
...Yours is the Earth and everything that's in it,
And - which is more - you'll be a Man my son!
Our experience has taught us that basic human behavior in the stock market does not change significantly from generation to generation. Panic and euphoria have and always will be the "mainstream" thinking on Wall Street.
This article analyzed the U.S. stock market from 1900-2008. It is most ironic that Rudyard Kipling's poem "If," quoted from above, is still as important today as it was when he wrote it...in 1895, five years before this market history review started.
That "herd mentality" you read about in the Wall Street Journal or Money Magazine is a herd that keeps reproducing, creating new generations of lemmings. Don't be one of them.
The information herein has been obtained from sources believed to be reliable, but Emerald Asset Advisors, LLC ("Emerald") does not warrant its completeness or accuracy. Prices, opinions and estimates reflect Emerald's judgment on the date hereof and are subject to change at any time without notice. Any statements nonfactual in nature constitute current opinions, which are subject to change. Projections are not guaranteed and may vary significantly. Further information on the firm and its advisory fees may be obtained from the firm's Form ADV Part II, which is available without charge upon request. Complete descriptions of all Emerald's products and benchmarks are available upon request.
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www.emerald-eas.com
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