Tuesday, July 28, 2009

Defining Long-Term Investing

I wanted to share some work conducted by Bert Whitehead, M.B.A and JD. Bert is an advisor at Cambridge Connection and a NAPFA member:

"This year's market bottom (so far) in March wiped out all the market gains in the Dow since 1996. That's 13 years, and that's a hard fact to swallow for a person who's invested in a broad-market index.

So if 13 years isn't long enough, what is?

When I started as a financial advisor in 1972, we were in the recession that had started in 1967. The Dow dropped from 1,000 to 607 from 1967 to 1974. That recession wiped out all gains since 1962 (12 years) and the Dow didn't get beyond 1,000 again until 1982. In fact, there was a widespread belief that the market could never go over 1,000. The financial pundits at that time subscribed to the theory that whenever stocks went beyond 1,000, companies would issue more stock. The additional supply would force the stock prices down, so the supply and demand curves intersected at 1,000.

Instead, the Dow boomed. From 1982 to 2007, the Dow went from 1,000 to 14,000. During that 24-year period, the market rose 9.8 percent per year peak-to-peak. Even measuring trough-to-trough bottoms of the Dow, the market increased an average of 10 percent per year, from 607 to 6,600, from 1984 to this year. The recovery from the Great Depression evinced a similar timeline and valuation pattern. Total average annual equity returns have been easily over 12 percent during the last quarter-century, when you add 4-6 percent dividend payouts.

Deciding not to invest in the market now, especially for younger people, could be the worst financial decision they could make. And remember: You are younger now than you will ever be for the rest of your life."

I'd like to thank Bert for the perspective. Yes, the market has moved sideways for 13 years, but we have been here before. Time and again, history has shown that every 25 year investment period has produced attractive returns.

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