Friday, February 6, 2009

History Has a Way of Repeating Itself

They always tell us that past performance is not indicative of future performance. As often as I have quoted this mantra, some individuals still like to forget this fact. If you consider the fact that the past 10 years was bad, then does it stand to reason that the next 10 years will also be bad? If you want historical numbers, why not REALLY GO WAY BACK IN TIME.

If you really want a historical perspective, how about taking a look at something for over 180 years. Is that sufficient time? The graph below may be hard to read but I'll make it simple. The black line is the divider - each column to the right represents the years that the US stock market posted positive returns. The first column is 0% to 10%, the second is 10% to 20% returns and so forth. On the left side of the black line, are the negative years. The first column to the left represents-10%-0%, the second column represents -20% to -10% and so forth.

What the chart points out is the simple fact that 70% of the time, returns are positive. In the majority of years, returns are from 0% to 20%. There are the obvious blips (last year was a big one), but in the past 184 years, there were only 9 years where the US markets declined more than 20%. There were 48 years in which returns were over 20%.

If this doesn't convince someone of the viability of equities over a long period as their investment of choice, I don't know what will.

Now before anyone accuses me of being boring and spouting out statistics and numbers, remember this - it is all about the statistics and numbers. History has shown that the majority of investors who react to negative market changes, fail to react to positive market changes too. Market timing is not based upon knowing when to get out, but also knowing when to get in. Missing by a few days wouldn't make that much of a difference right? Wrong !!!

Here's a great tool to help understand market performance. This link brings you to an online calculator from Dynamic that shows how fund performance tends to "level out" over long periods of time. By selecting different "holding periods", you can see how as you move to longer periods of time, the frequency of losses in the markets declines and eventually drops to zero.

Remember a simple fact when it comes to investing. As Warren Buffett says "We don't have to be smarter than the rest, we have to be more disciplined than the rest".

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