Have We Hit Bottom Yet?

Is it really different this time? These are the burning questions that most of us who have money invested in the equity markets are asking. Let’s look at the history of the Dow Jones Industrial Average (DJIA) and see if we can really see a light at the end of the tunnel. As of March 31, 2009, this major stock market index has seen six straight quarters of negative returns. This marks only the second time that this has happened since 1900.

The first paragraph doesn’t bode well for an up-beat and positive story, does it? Well here are some interesting statistics that may give you some insight into how you may want to allocate some of your personal wealth and savings.

The only other occurrence of six straight negative quarters was in the second quarter of 1970. Following that pitiful performance, the DJIA returned more than 11% the following quarter, more than 22% the following six months, and more than 30% the following year. Not bad for a market that appeared to be going nowhere.

Let’s dissect this wreckage further. Obviously the last quarter of 2008 was the fifth straight quarter of negative returns. Only six times has this occurred since 1900. Only once in 1970, as discussed above, did the trend continue. In the other five occurrences the DJIA recorded positive returns the following year. The average return was more than 43%, while the median was more than 15%.

In addition, March 31, 2009 was the ninth occurrence where the DJIA saw two straight quarters of double-digit negative returns since 1900. The average return one year later was almost 23% following these occurrences of back-to-back quarters of double-digit losses. The only exception where positive returns were not posted was after 1931.

So how are you feeling about your investments today? Historically speaking, the majority of the previous occurrences where equities were in a similar situation as today, it proved to be a significant buying opportunity. Of course there are no guarantees when dealing with equities.

Your decision to stay invested will hinge on your personal goals, and more importantly, your emotions. Unless your long-term goals have changed, you will not be helping yourself by changing your investment strategy. The only way to truly appreciate the spectacular returns that equities have provided over the last century is by staying invested. As an equity investor you must learn to live through the temporary declines that inevitably will occur. Your alternative today is to “cash in” at the bottom and live with 3% GIC rates to fund your retirement. Speak to your financial planner to assist with these most important financial decisions.

This is a monthly article on financial planning. Call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of FundEX Investments with your topics of interest at 798-2421 or E-mail at rick@invested-interest.ca.