Stock Market Performance: Are
You on the Outside Looking In?
By Austin Pryor
© Sound Mind Investing | May 2010
With the first quarter continuing the market's solid uptrend, here are the results (through April 19) Upgraders have experienced since the market low a little over one year ago:
- +85% Upgrading (Using SMIFX as a proxy)
- +77% S&P 500 Index (large companies)
- +107% Russell 2000 Index (small companies)
- +75% EAFE Index (foreign companies)
Very good news for those who stayed the course, but a bit of heartburn for those who headed for the exits during the fear-filled days of the bear. A friend of mine (who knew better and shall remain nameless) sold his holdings, abandoning his long-term stock allocation. He wanted to stand aside until a more promising investment climate took shape.
The problem has been (and will always be) that the market begins heading up many months before a "promising investment climate" becomes evident. By definition, the market's greatest upside potential is at the bottom when the outlook is the darkest.
So, he asked, what should he do now? My advice was that he consider dividing his stock allocation into four parts and invest the first 25% immediately. I suggested this, not because I have a particular view as to what the market will do in the short-term, but because my friend needs to overcome his paralysis. If his goal is to get back into the market, then the only way I know how to do that is to start getting back into the market.
Now, whether he takes this first step with 20%, 25%, 33%, or 50% of his total stock allocation is a matter of personal preference. I chose 25% because that didn't seem too bold a step, even given his current fear that he's waited too long and may well be investing at the end of the rally. But you've got to start somewhere, and this approach would still leave 75% safely on the sidelines for the time being.
I suggested he then wait 6-8 weeks (or sooner if he was emotionally ready) and see if he felt comfortable putting another 25% in. It would be nice if he had a little profit by that time to encourage him, but there's certainly no guarantee of that.
I don't know what his decision will be, but thought I'd pass along our discussion in case there are others like my friend…on the outside looking in. If this is your situation, perhaps you would be encouraged by these historical norms:
- The first year in previous bull markets has recovered, on average, 84% of what was lost in the entire preceding bear market, according to Sam Stovall, chief investment strategist at S&P Equity Research. The current bull run has retraced only about half of the loss, so there is room to continue growing.
- The 13 bull markets since 1930 that have lasted more than a year have lasted 4.4 years and averaged a total gain of 153%, according to Bespoke Investment Group.
Of course, it could all be different this time. But the longer this advance goes on, and the more the economy steps away from the brink of what has been a brutal recession, the better the chances that this bull market holds its gains.
But what if it doesn't? In that regard, we might consider the viewpoint of John Hussman, the highly regarded money manager who is also well known for his economic analysis. Currently, he is pretty far out on the negative end of the forecasting spectrum. His model recently showed some of the worst implied 10-year future returns for the stock market of any point in the past 60 years. But really, the 5.83% annualized gains he forecasts for the next decade aren't that bad. They're just not as good as we're used to.
Even more bearish is Jeremy Grantham, who gained wide acclaim for his impressively accurate (and mostly very pessimistic) market calls going back to the late 1990s. He expects the stock market's returns over the next seven years to largely resemble those of the past decade. Ugly stuff, although Upgraders still managed 79% cumulative gains over the past decade while the overall market languished.
Given that returns may well come in between the extremes of the bullish and bearish expectations, this information seems to make a strong argument for doing what you probably already know you should be doing: sticking with your long-term plan. If your current stock allocation is below what your plan calls for, it's (past) time to begin bumping it back up.
This, of course, assumes you have at least a 5-10 year investment time frame, the minimum holding period we always advise for stock market investing. If you're closer than that to retirement (or otherwise needing the money), then continued caution is the prudent course.
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Austin Pryor has three decades of experience advising investors, and is the founder of the Sound Mind Investing newsletter and website. Austin lives in Louisville, Kentucky, with Susie, his wife of 46 years. Two of his sons, Andrew and Matthew, work with him at Sound Mind Investing. A third son, Tre, is a Realtor® in the area. |
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