Hello, my name is Art and I am a bull.
The last several months have been quite volatile for the market. We have seen big gains and losses if you look at the market with a daily perspective. The financial press seems to favor this day to day outlook but yet most of the investors I work with have financial goals that extend years (and decades) into the future. But with all the doom and gloom in the media they ask "is the market safe"?
I am firmly convinced that market risk decreases significantly with time.
If you are investing in the market today and need to fund your goal the very next day, the market risk is incredibly high. There are just too many factors which can not be predicted which can cause the market to fluctuate – often irrationally. On the other hand, if you are investing today and have years ahead until you need to access the money, market risk is effectively eliminated.
In the early 2000's we found ourselves in a market that was adjusting from the great tech bubble of the late 1990's and suffering the after effects of 9-11. The market was in the tank. The safety of the market was in doubt. I decided to do a little research. In March 2002 I examined the monthly rolling 10 year returns of both the S&P 500 and the Dow Jones Industrial Average (DJIA). The Dow study started January 1950 and the S&P study started in January 1960. The results are convincing. In all that time there was never a single period where either index posted a loss over ten years! The low point for the Dow was December 1964 to December 1974 when the average annual total return was +0.29%1. The low point for the S&P was September 1964 to September 1974 (gee what a surprise) when the average annual total return was +0.45%1.
With returns less than ½% per year, inflation was certainly working against those investors. But other studies have been more extensive and still came to the same conclusion as mine; the longer you are invested in the markets the effects of market risk and purchasing power risk are reduced. Other studies have concluded that in timeframes of 15 to 20 years there has never been a period where the market did not keep pace with inflation.
Armed with this knowledge and a long investment timeframe I am a bull. I'll always be a bull until either the facts change or my timeframe shortens. Unfortunately, good news gets low ratings and sells few newspapers and magazines so the press likes to be bears.
Over 20 years (from 1985 to 2004) stock mutual funds averaged returns of 12.1%2 but investors averaged only 3.7%3. Could part of the reason be that those investors did not have the discipline to stay fully invested during the down times like the one we are in now?
Charging Bull by Christopher Chan
1 Source: MainStay, New York Life Investment Management LLC, Rolling Period Reports dated March 28, 2002
2 Source: Morningstar Associates, LLC
3 Source: 2005 Quantitative Analysis of Investor Behavior, Dalbar Inc.
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