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Bulls, Bears: That Wild, Wild Market

August 23, 2007 By:
Fred D. Snitzer, JE Feature
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By now, the sum of energy, time and words that have gone into explaining the reasons for the current market swoon (and what this swoon means for the future) is so vast as to constitute a potentially new energy source.

Reams of paper, electronic words and -- unfortunately -- audible ones, have spilled forth from those experts who spend their living studying the markets, dissecting its every move, comparing this correction with every correction of the past, beating the data into a bloody pulp of statistical overkill, and offering words of wisdom and advice for what to do next.

Not surprisingly, the opinions and the advice are all over the place, and the result of this cacophonous outburst is to bewilder and confuse us even more.

Whether the dive is a healthy correction or a sign of bad things to come, no one really knows. But people are not paid to write columns, appear on television or sound smart by saying: "I don't know." However, the truth is they don't know, and neither does anyone else.

Everyone is looking at the same conflicting set of data. For the pessimists, there is the subprime mess, the end of easy money and high oil prices. For the optimists, there is continued strong GDP growth, low inflation and an expanding international economy.

We don't know which of these scenarios will turn out to be the right one but, regardless, we don't think the end of the world has arrived. Here are a few facts to help keep things in perspective:

· Triple-digit swings in the market, either up or down, are no longer that exceptional. The higher the market, the more triple-digit swings we should see. Between 1997 and 2006, the market rose or fell 100 points an average of 64 times per year. Between 1987 and 1996, the average number of times the market rose or fell 100 points was two times per year.

If the market is at 14,000 and it falls 500 points, that's a 3.6 percent drop. If the market is at 2,250 -- which is where it was in October 1987, after the "big crash" -- and it falls 500 points, that's a 23 percent drop. A 500-point drop is nothing to sneeze at, but the absolute point drop is not as meaningful as the percentage drop.

· The "market" that everyone is watching is the Dow Jones Industrial Average, an average of 30 stocks. There are an estimated 15,000 stocks that trade on the various U.S. markets. So, the market that everyone is watching represents .2 percent of the number of stocks in the entire U.S. market, not to even mention the overseas markets.

While it's true that just about all of the varied stock indices that cover the U.S. market were down recently, they were not all down the same amount, or in the same way.

· Even with the volatility of the last few weeks, the Dow Jones Industrial Average is still up 4.9 percent for the year, as of Frinday, Aug. 17.

· Most importantly, a well-diversified portfolio, comprised of the best managers in all asset classes, and with your assets carefully allocated among these asset classes, is the best defense against the inevitable winds of volatility that the market will whip up when it gets irrationally spooked, or when it punctures its balloon of unjustified complacency.

For the poor souls who invested in the NASDAQ in the beginning of 1999, they are still (!), even now in 2007, just about breaking even. In other words, they have not made a penny.

If they invested at the peak, they are still down 50 percent. But for those investors exposed to stocks in the Russell 2000, the MSCI EAFE, the S&P 500, and other asset classes, in addition to the NASDAQ, they weathered those trying times well, and have seen the value of their portfolios grow, despite being fully invested in the market during the three long years of 2000 to 2002.

For those of you who were invested in the market during 2000 to 2002, you have already learned this lesson well, and you know this philosophy works. We hope we're not entering another period like that; we don't know if we are or we aren't. But if we are, we know it won't last forever, and we know that you will emerge a winner, for the simple reason you won't have lost more than you have time to recover.

So far, history has proven that -- in the long run -- it's wise to be bullish about America.

Fred D. Snitzer is chief operating officer in the investment-management firm of Prudent Management Associates, specializing in high-net-worth and tax-deferred asset management.

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