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Dr. Paul Price
Dr. Paul Price
Articles  | Author's Website |

Stop Fighting History

September 26, 2014 | About:

Market Timing = Self-Inflicted Wounds

The stock market carnage that occurred in 2008 left lasting scars on the investing public. That experience was similar to a cat that got burned after sitting on a hot stove. It will never sit on a hot stove again… or a cold one.

There have now been twelve significant (5% or greater) interim declines in the Standard & Poors 500 since the final bottom was made on March 9, 2009. The worst of them took place during the summer of 2010 (-15.99%) and in late 2011 (-19.39%) while the debt-ceiling crisis played out. The late 2012, "Fiscal Cliff" debacle also led to a moderately uncomfortable almost 8% decline.

On each of those occasions the predominant media recommendation was to sell into the panic. CNBC's talking heads gleefully reminded everyone of the final (-56.7%) damage from the October 2007, peak through the March 2009 nadir. I remember hearing and reading repeatedly that, "after a 50% drop, stocks would need to double, just to get even.”

What the pundits failed to mention was the historical tendency of beaten up shares to accomplish that feat, and more. On Sep. 25, 2014, five and a half years after 2009’s low, the S&P 500 index had gained 197.3% plus dividends.

Those who stayed the course are well ahead of where they were at 2007’s pinnacle

People that were scared out of stocks near the lows have barely recovered anything, largely due to the Fed’s ZIRP (zero interest rate policies).

12 out of 12 of the previous greater than 5% sell-offs preceded new all-time records on the S&P 500 and the DJIA. In retrospect, every one of those mentally taxing times was actually a buying opportunity.

2008 was a once-a-generation event that was more of a financial crisis than a reflection of what stocks were worth. Thursday’s (Sep. 24, 2014) big down day (DJIA off by 265 points) came on a Jewish holiday when many professional traders were not around to bid for bargains. Friday’s futures indicate a higher opening today.

You cannot invest directly in the S&P 500 index. You can own the S&P 500 ETF (SPY) though. The SPY’s total returns reflect what a buy-and-hold investor would have earned net of all expenses, but before taxes on any distributions.

Six of the last seven calendar years were winners. Include 2014 YTD, and make it seven out of eight.

Mom and Pop have shot themselves in the feet while torpedoing their 401ks, IRAs and college savings accounts. Some got out during crisis periods and never returned to stocks. Others attempted to be market timers, usually with bad results.

Bad memories of 2008 led to huge net equity fund redemptions on virtually every major sell-off and after many rallies as well. Most Americans simply wanted out due to painful, relatively fresh memories of the Great Recession's market action.

It took a better than 32% rise in 2013 to finally attract a modicum of net purchasing. Once again the old adage to “Buy low and sell high” sounded good on paper but was ignored when real money was on the line.

This year’s S& P 500 gain of 6.36% plus dividends has not been enticing to investors. Equity mutual funds have seen net redemptions once again during 2014 YTD. That probably accelerated yesterday.

Our politicians have failed to learn anything from the housing and the sub-prime lending crash of 2008. Based on recent market action, traders haven’t gotten their acts together either. They continued to buy high and sell low this past summer.

Smart investors welcome the chance to buy good quality shares at cheap prices. They love overvalued periods for the opportunity to exit at high prices.

The biggest risk you can take for the long term is being out of the market, not being in it

Study market history. Invest accordingly.

About the author:

Dr. Paul Price


Visit Dr. Paul Price's Website

Rating: 4.4/5 (10 votes)



Grox01 - 5 years ago    Report SPAM

Wonderful article, thank you Paul for all the teaching :)

Praveen Chawla
Praveen Chawla premium member - 5 years ago

Love it. Harnessing the power of compounding.

Redracecar94 premium member - 5 years ago

Great advice! Thank you, Paul!

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