My father is a hobby pilot, and I enjoy the times when we occasionally take business trips in his old 1968 Mooney. There are times when those plane rides get a little bumpy, especially at the lower altitudes. However, when we climb to a higher altitude, what was a bumpy ride generally turns into a very smooth trip. Investing can be a similar experience. There are times when the ride is bumpy and it takes looking at things from a 10,000 foot level to experience a smoother ride.
2011 and thus far the first half of 2012 was flying the plane through quite a bit of turbulence. Investors were churned through the year by a weather and nuclear disaster in Japan, a deadlock over finances in Congress that led to a downgrade of U.S. debt, and a major crisis in Europe that threatened to blow apart the European Union and end the Euro as a currency. Investors were pounded with headlines predicting economic disaster and even another Great Depression.
In fact, investors may feel they have been flying in turbulence since 1/1/2000. We started that period with the "dot.com" crash, then started a recessionary period in 2001, experienced the terrorist attack on 9/11/2001, ultimately recovering only to enter the market crash of 2008 which took many investors down 50%. We've been in a constant state of war since early on in this period, had corporate scandals, historic debt, political divisiveness, and high unemployment. During August of last year, emerging markets, foreign stocks, and small cap US stocks all declined approximately 20%...in 5 days. It's been bumpy, but instead of landing the plane, let's go higher and look back at this period at 10,000 feet. Would it surprise you that the best performing markets over the last 12 years has been international and emerging markets? Not just by a little. Would it surprise you that that the riskier small cap US stocks have well outperformed the blue chip S&P 500 (US large cap) stocks during this period of turbulence?
Is it different now?
Even though the Chicken Littles will tell you it's different this time, a look back at market history suggests it never is different. Consider some history:
Over the last 61 years, the Standard & Poor's 500 Stocks Index has increased by 11 percent compounded annually. Those gains came despite 10 bear markets and 10 recessions.
Think the 2008 financial and auto bailouts were unprecedented? You are forgetting the $293 billion bailout of the savings and loan industry in 1989, the $10 billion bailout of New York City in 1975, the first bailout of Chrysler in 1980, the bailout of Lockheed in 1971 and numerous others.
Unemployment topped 8 percent in 7 calendar years, 9 percent (not counting 2011) in five calendar years, and 10 percent in three calendar years.
European debt crisis got you down? How about the Latin American debt crisis of the 1980's, the Japanese asset bubble burst in the 1990's, the Asian debt crisis in 1997, and the Russian debt crisis of 1998?
Over this period one president was assassinated and unsuccessful attempts were made on three others. We had terrorist attacks in New York, Washington D.C. and Oklahoma City.
The United States fought in five wars and numerous military engagements. It faced the Cold War and the Cuban Missile Crisis.
Society was entangled in struggles over various civil rights and environmental movements.
All of these events and trends roiled the markets. At the end of the day, $1 invested in big U.S. stocks in 1950 is worth about $600 today. Think times are tough today? Yes, they are, but they've been tough, sometimes even tougher, in recent history.
What's your job?
We recognize that we live day to day in the lower turbulent altitudes of life. We're here to help you see your investments at the 10,000 foot level. We help to put perspective next to emotional responses. We help you avoid doing anything rash, remain diversified and stay the course. That's how you reap a decent long-term return.
Will this time be different? Perhaps...anything is possible. But a look back at history suggests that the odds are on the side of long-term investors who vow to weather the short-term storms by learning to fly higher.
