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The Little Engine That Could

There will always be mountains, big and small, that present challenges as we invest throughout our lifetimes. As individuals we are small relative to the global capital markets and just as the "little engine that could" never gave up, we as investors should never give up or completely stop investing if we get discouraged or scared. Sometimes we need encouragement or a glimpse of the light at the end of a tunnel to get us through worrisome times. As we begin the fall season, we expect there to be market volatility (as there always is) resulting from numerous events/issues present today.  Some we have known about for a while and others are unpredictable, such as the case with the conflict in Syria. The markets are sure to bounce around as news on each issue is factored into the markets.

Capital Markets

How should we as investors respond to all of this? There are three key messages we would like to emphasize: 1) Accept the fact that there will ALWAYS be hills and mountains to climb; 2) Maintain a rational perspective - don't assume Armageddon, and 3) Stick with your plan, but review it as necessary.

Climbing Hills and Mountains
The odds are that there will be some challenges along the way, and we should expect that. Here are some observations about stock market returns over the past 87 years to help give some perspective.

  • Full calendar year returns are more likely to be positive than negative.
    •  72% of the time the market posts a positive return (63 of 87 years).
    • Average return has been 9.8% since 1926.
  • Expect some level of pullback during the year.
    •  Every single year since 1926 has had some level of pullback.
    • Pullbacks of 5% or more occurred in about 68% of years (59 of 87 years).
  • Market pullbacks of less than 5% are not as common.
    • Intra-year pullback of less than 5% occurred 32% of the time.
    • Average intra-year pullback is 11.6%.

Market pullbacks are in general buying opportunities for those entering the market for the first time or investing in the market with each paycheck.

Armageddon Isn't the Usual Outcome
Referencing a graph we showed last year, we believe Exhibit 1 is a powerful illustration of how the markets have had to deal with many events over time. Over the long run, however, markets and people continue to advance and evolve. For the stock market, the factors that really matter are corporate earnings and the price one pays for those company earnings.

Exhibit 1: Long-Term Performance of S&P 500

Long-Term-Performance-of-S-P-500
Source: St. Louis Federal Reserve; Blumenthal, Karen. “As Dire as Times May Seem, History Isn’t About to Repeat Itself,” Wall Street Journal, October 8, 2008; Morningstar Direct, refl ects S&P 500 Index (1/1926 - 6/2012).

As we get caught up in the issues we face today, it is easy to forget that we have overcome some pretty formidable problems in the past. Through Depression, recession, deflation, inflation, and war, the economy and stock market have persevered. After each challenging period, the stock market has recovered and continued on its way up. For example, during the Great Depression the stock market hit bottom in July 1932 - that was the point of maximum anxiety when it really felt the worst. After that point, the market recovered 415% over the next five years by February 1937.

Stick to the Plan
Fear of market events is not a good reason to try to time the market or make any changes in your portfolio. However, it is important to review your financial plan from time to time with the help of a financial advisor. If your financial situation or needs have changed, it may be a good time to discuss the return and/or risk characteristics of your portfolio to make sure you still have the best plan to meet your goals. Otherwise, just like the famous engine from the 1930s children's book, the best way to make it through the ups and downs of the market is to stick to your plan.

Data source: Morningstar Direct. S&P 500 Index calendar year data is Total Return data from 1/1/1926 – 12/31/2012. Pullbacks are the largest drawdown, peak to trough, for the calendar year periods.

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