Any investor should be willing to admit 2011 was a pretty crazy year for the markets. They 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. The third quarter saw world markets swoon to bear market levels, only to recover swiftly in October, which turned out to be the best month for investors in 20 years. Withdrawals from mutual funds indicated that many investors fled the market altogether during the year after being pounded with headlines predicting economic disaster and even another Great Depression.
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 1980s, the Japanese asset bubble burst in the 1990s, 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 by the Civil Rights, Black Power, Equal Rights, Gay Rights, and the 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—or even tougher—in recent history. Your job as an investor is to control your emotions, don’t do anything rash, remain diversified, and stay the course. That’s how you reap a decent long-term return.
Yes, it is true that many investors have made next to nothing for five years running—mainly due to the 2008 bear market. But that trend is unlikely to continue. Long periods of high volatility and underperformance by the stock market have always been followed by extended periods of outperformance and lower volatility.
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.
