Mark Hebner / Mary Brunson

IFA's Quote of the Week - 28 (James Pardoe)

 

"Let other people overreact to the market...if you can stay cool while those around you are panicking, you can surely prevail."

James Pardoe, author How Buffett Does It, 2005

James Pardoe's message provides a much-needed perspective on the long-term positive attributes of equity investing. Certainly, equity markets do not always deliver positive returns in a steady upward fashion. Instead, equity markets are volatile. This short-term volatility is the reason we expect a long-term return.

June 2008 was an ugly month for equities. A combination of oil prices hitting record highs and bad news about credit and housing caused the S&P 500 to give up about 8 percent for the month—a tough pill to swallow.

Sudden and sharp drops in the stock market make for scary headlines. They can also make for sleepless nights for investors who look at precipitous drops in their account balances without an awareness of the ample backdrop of historical data that shows we have been here before and eventually recovered the loss. For this reason, an understanding of stock market history enables investors to maintain confidence in capitalism and the long-term staying power of the equity markets.

IFA recently conducted a study of one-month declines in the all-equity Index Portfolio 90. The study covered the 38.5-year-time period beginning with analysis from the beginning of 1970 through June 2008 and filtered for the most significant one-month drops. The table below shows the results of the study. It lists 13 of the most significant one-month market downturns and subsequent recoveries for IFA Index Portfolio 90.

As the table shows, there have been some punishing one-month blows to the equity markets throughout recent history. October 1987 delivered a particularly spooky one-month decline for investors. The S&P 500 lost a whopping 21.5% that month and Index Portfolio 90 gave up 19.72% of its value.

Such quick and punitive drops surely sting investors. However, history shows that those who stayed the course were rewarded for their confidence. The study reveals that in the 1-year, 3-year, 5-year and 10-year periods subsequent to such blows, capitalism’s upward march largely regained its footing. For example, in the year that followed October 1987, from November 1987 through October 1988, Index Portfolio 90 surged ahead 24.08%.

This important data provides a solid backdrop against which you can make prudent decisions regarding your long-term investments. This information shows that we have indeed experienced volatility that has cut a wide swath through returns in even broadly diversified portfolios. However, despite these short-term blips, those who stayed the course were amply rewarded for their conviction. The key to successful long-term investing is to invest in balanced, risk-appropriate and diversified portfolios and focus on long-term returns.

Index Funds Advisors is an expert in measuring and quantifying risk capacity for the long-term investment needs of individuals, 401(k) plans, institutions and corporations. This important measure enables investors to make sound decisions that can help them earn returns commensurate with the risks they take. IFA specializes in the passive rebalancing of risk-appropriate, globally diversified index portfolios that are low cost, tax managed and efficient.