Doug Short makes the best graphs of the market that I’ve come across. His dshort.com website offers great analysis. There are a number of take-aways from his chart of the S&P 500 from 2007’s peak right through last week’s action.
It took 17 months to reach the absolute low set on March 9, 2009, which was a heartbreaking 56.8% drop from the Oct. 9, 2007, all-time high. The April high for 2011 represented better than a double from the dead low. As of last week’s close we were still 17.2% below the 2007 peak (excluding dividends).
It would be easy to conclude that you couldn’t have made money during a period when the market dipped but has not regained its old highs. That would be a bad assumption. Doug notes that his graphs don’t reflect dividends or reinvested yields. That significantly understates the total return for those who simply bought and held. It also gives no impact to opportunistic investors who committed more money at or near the bottom.
Once a stock is down by 50%, the potential gains are highly magnified. Think about the simple math of the situation:
| Partial Rebound |
(-25% from start)
| Gain for Buyers |
(to original price)
| Gain for Buyers |
|$100||$50||$75||+ 50%||$100||+ 100%|
Any new purchases either through dividend reinvestment or via outright new money had the chance to make 100% profits even as the shares ended up exactly where they began. Those who saw opportunity and didn’t cave in to the panic could easily be better off today than they were prior to the sell-off.
Forcing yourself to buy when everyone around you was shouting Great Depression was easier said than done. That’s where it helps to know your long-term history. Here’s a chart from FactSet Research Systems showing the eight separate 5% or greater pullbacks since March 2009 have all been buying opportunities.
Making your buy and sell decisions based on fundamentals almost always works out better than trying to time the market. Those prescient enough to get out early probably didn’t get back in near the lows as they were too busy congratulating themselves for being out.
About the author:
Dr. Paul Pricehttp://www.RealMoneyPro.com