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Sure, the Markets Always Come Back . . . Some Decade or Other

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A few weeks ago, Karen Datko of MSN's SMART SPENDING picked up an entry from the blog. The blog was written by a woman in her late 50's, a woman striving to save for her retirement. The entry lamented the impact that this year's decline had on several funds the woman held, all stock index funds. Her investments had dropped 17 percent over the last six months despite her diligent deposits each month.

She was operating under the impression that she had begun saving so late that she needed the greater returns sometimes offered by stocks relative to bonds. She offered the rationale that she didn't believe bonds to be appropriate for her age or her particular circumstances.

Some respondents questioned her rationale. They suggested that she diversify her portfolio and consider approaching a professional money manager for advice. However, a hefty proportion of respondents offered comments such as those by Fredie. Fredie, while also suggesting she see a money manager, added, "I have looked at the market since the 87 crash and have been able to remain sane even through the early 90's . . . don't sweat the market but play long and keep playing . . . look at the Dow over the last 10 years and you would see that the Dot Com bust appear [sic] as a blip."

Perhaps Fredie and some of the other respondents should have looked a little further back than 1987 before offering too many comments about what markets do.

Courtesy of Stockcharts.com, here's a portion of the S&P 500 chart from the mid 60's to the mid 80's.

SPX Chart:

Yes, the SPX was generally climbing during this two-decade period, but I want you to note something different. Note the horizontal line marked at 103.71? For perspective, follow that line from the 1969 high over to the year 1980. Although the SPX scrambled above that line for up to a couple of years at a time for a while, note that consistent values above 103.71 were not maintained from 1969's high until after 1980.

Imagine the case of an investor who jumped into S&P 500 stocks with both feet when the S&P 500 was at about 103.71 during some period in 1969. If that investor had taken the "it always comes back" route and held on, that investor would certainly have finally been rewarded with consistent prices above 103.71: in 1979-1980.

Is this a wise choice for a woman in her late 50's, to blindly hold onto a stock-only and undiversified (away from stocks) portfolio through all those ups and downs? At some periods, a woman who held on during the decline in the late 1960's could have taken money out of the market and benefited or at least broken even. However, imagine that she had reached a time when she needed to cash out some of those funds when the markets reached 103.71 again in 1978. Those who remember the stagflation times know that those 1969 dollars weren't going to buy as much if she happened to need to take her money out then.

In addition, that scenario presumes that she lived through and kept her money in the funds through the heart-stopping drop in 1974. The problem with the buy-and-hold scenario is that many investors who espouse a buy-and-hold strategy eventually panic: they hit a point of maximum pain, such as many must have hit in 1974, and cave. Or they have no choice as the money is needed.

Perhaps you think this period was unique. Not so much. Some of have probably seen the portion of Dow's chart depicted below, also courtesy of Stockcharts.com.

Chart of the Dow:

Anyone jumping in feet-first to Dow-related investments in 1928 and holding on through the pre-crash period and then into the 1932-1933 period would have had to have waited until 1951-1952 until their investments came back with any lasting power. Obviously, some wise investors could have cherry picked Dow-related stocks, buying and selling, and making bigger profits, but the point is not negated.

Would a woman in her late 50's in 1928 have been able to hang on until 1951-1952, or, might she have faced financial needs that forced her to sell some of those stocks at a loss during her retirement years? Would a man in his 30's in 1928 have been able to wait that long before pulling money out to help pay for a home or a child's college expenses?

One more chart. Remember Fredie's comment about the last recession having been a "blip" in the markets? In early 2000, when the stock market began rolling over, CNBC reporters took to the street, asking people walking down Wall Street if they intended to sell their stocks. Almost without exception, those investors being interviewed answered something the equivalent of "No, I'm a buy-and-hold person," or "I'm in the market for the long run." Many of my trading friends expressed similar opinions, and many of them were heavily invested in the big momentum stocks of the day, such as JDSU.

Monthly Chart of JDSU:

Was the decline a mere blip? I don't think so.

Will traders who bought JDSU and similar stocks and held ever get their investments back? Perhaps, but perhaps those of you who lived through the 2000 decline don't realize that it's already been the better part of a decade since JDSU began its long slide lower.

Am I saying that blogger will see further devaluation of her stock-only retirement fund or that she'll have to wait one or more decades before it climbs back to its late 2007 level? I don't know what will happen with her fund, but I wish that people, even in the financial community, didn't keep reassuring others that "they always come back."

Mostly stock prices do come back, but does your time window allow you to wait, or will you be forced to sell after even steeper declines, if they come? Back last fall, I read a report from a market advisor who told investors they should cash out then if they didn't think they'd have the nerve to endure a 30-percent drop. A friend who works for a fund manager told me of panicked phone calls her office was receiving when markets were hitting recent lows, calls from people who pulled their accounts at the very bottom.

I'm not saying that they shouldn't have pulled their accounts, but I am advising against a buy-and-hold strategy in an undiversified account if you don't have the time frame, the financial means or the stomach for such a strategy. I went to cash myself in most of our accounts, but I did it last fall, near the market highs, not at the recent lows.

I'm not trying to scare anyone, only urging people not to believe the hype that's bandied about so readily. I want people to question and not listen blithely to dogma, do some investigating of their own and make wise decisions about diversification and recession-era investing. I'm trying to do the same thing. Don't be scared, just be prepared, and seek the help of a professional if you need it.

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