Fisher Investments Editorial Staff
US Economy

Even Steven

By, 10/12/2009

Story Highlights:

  • The stock market rally of the last several months has many investors breathing easier than they were earlier this year.
  • Some might even consider changing their strategies once they've recouped some or all of their losses.
  • Such decisions are based on emotion, not long-term goals, and can be detrimental.
  • Previous high water marks for stocks, bonds, or any other investment are arbitrary levels that don't foretell how investments will perform in the future.

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Stocks rose every day this week, resulting in 4.5% and 4.6% weekly gains for the MSCI World Index and S&P 500, respectively—the best single week for both since mid-July.* This adds to the tremendous stock market rally that has the MSCI World Index up 68% and the S&P 500 up 61% since the March 9th stock market low.* Most investors are now breathing much easier than they were earlier this year. Unfortunately, for some this sense of relief is accompanied by the urge to change to their investing strategies once they've recouped some or all of their bear market losses. They swear if they can just get back to even (or somewhere near even) they'll never look at another stock again. Emotional decisions like this almost always lead to investing errors. Instead, achieving long-term investing goals should be the focus of every investment decision.

Previous high water marks for stocks, bonds, or any other investment are arbitrary levels that in no way foretell how investments will perform in the future. Investment returns over long periods include both rising and falling markets. Historically, for stocks, rising markets have collectively surpassed falling markets to achieve returns of about 10% per year on average since 1926. If asset prices never surpassed their previous highs, they would never achieve long-term gains.

Some might look at the lackluster stock market performance over the last 10 years and argue this notion no longer holds water. But the past decade is one of the rare exceptions. True, stocks have been flat over the past 10 years—a period that included two severe bear markets. But going back a bit further, the S&P 500 has doubled over the last 15 years (including reinvested dividends) and is up over 365% over the last 20 years. Fact is, there has never been a 20-year period in which stocks didn't have positive returns.

A look at the S&P 500 following bear markets provides historical evidence of the folly bailing out of stocks once they reach previous highs. The table below shows the 12 S&P 500 bear markets preceding the most recent, including the breakeven dates and cumulative returns 1-5 years following breakeven. Not only have the years after stocks recover from a bear market almost always been positive, they provide very strong returns on average.

 

Selling stocks because they are at or near a new high makes no more sense than fearing the S&P 500 reaching 1,000, the Dow reaching 10,000, or any other misleading milestone. There's no reason stock prices should stall out just because the losses of a bear market have been recovered. Stocks always look ahead, not backward.

It's always possible events unfold to derail stocks even before recovery is complete—investors should always be wary of such risks. But barring something currently unforeseen by investors and unrelated to the stock market level, it's far more likely stocks continue to move higher after the breakeven point.

Changing course just as stocks recover from a downturn almost assures missing out on positive periods that account for a substantial portion of long-term investing gains. Investors should focus on their long-term goals and the forward-looking prospects for their investments, not arbitrary index levels.

 *Source: Thomson Reuters

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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