The fact that we are currently experiencing a severe recession generates little “shock value” to most of us by now. We have read about and heard about the weakening state of the economy for the past 18 months. We have witnessed a 50 percent drop in the overall stock market. While not everybody has reached the point of emotional capitulation, it is safe to say that a large portion of the investing public feels at least some degree of battle fatigue. In addition, current economic forecasts continue to range from desperate to optimistic. The dispersion of opinion and outlook makes the view of our economic future increasingly cloudy, not less so.
Any extended downward trend naturally lends itself to thoughts of “taking a break” and “catching your breath”. In the investing world, this may translate to taking some money off the table by selling your stocks and moving to cash with the hopes of jumping back in when things turn around. However, the financial damage caused by giving in to this temptation could significantly outweigh the brief respite of peace and calm that you might feel by moving to the sidelines during a volatile market.
The bulk of positive returns from any bull market come in the first few months after prices have bottomed out. This means that by the time you are comfortable that stocks are done falling and it is safe to jump back into the market, you may have already missed a significant portion of the positive returns associated with the recovery.
The table below illustrates this point in greater detail by examining 16 full market cycles, defined as peak to peak, occurring between 1926 and 2008.
Returns are highest from the market bottom to 3 months after the market bottom, generating monthly compounded returns of 5.7 percent as compared to 1.8 percent for the remainder of the recovery. Also note are the large negative returns experienced from market peak to market trough.
Also In This Issue
Quarterly Review Of Investment Policy
Mutual Fund Fee Reform Waits For Another Day
Investing In Corporate Bonds
The High-Yield Down Investment Strategy
Recent Market Statistics
The Dow Jones Industrials Ranked By Yield
Recommended Investment Vehicles
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