The Dow Hits a New High! A Light at the End of the Tunnel?

This guest post is from Joni Clark, the Chief Investment Officer at our partner, Loring Ward.  She addresses the recent headlines to determine if they are in fact newsworthy.

On March 5, the Dow Jones Industrial Index rose to a new record high of 14,254, a level not seen since October of 2007.  The milestone dominated headlines, giving many investors the sense of renewed promise in stock market investing.

090611_1186The truth is, the milestone was not that meaningful. The index actually recovered its losses from the financial crisis period more than a year ago. Actually, investors have been enjoying solid returns from the stock market for almost four years.

Keep in mind that the stock market index values quoted in the media generally do not account for the reinvestment of dividends.  Since reinvested dividends compound over time, their impact on the performance of an index — and, more importantly, on an investor’s portfolio — is significant.

With dividends reinvested, the Dow Jones Total Return Index (symbol DJITR on Yahoo! Finance) actually reached its pre-crisis peak in January of 2012. The Index has more than doubled since the financial crisis drove the Index to its lowest level on March 9, 2009, generating a total return of 151% for investors (as of March 6, 2013).

As of March 2012, the S&P 500 Index with dividends reinvested also recovered the losses suffered during the financial crisis, and has generated a total return of 133% for investors from March 9, 2009 through March 6, 2013.

The recovery took nearly 4½ years, which felt like a long time to investors, but appears broadly consistent with past market cycles. The table shows how many years were required to achieve a new high during some of the major market corrections in the past.

Market Cycles Based on Month-End Value of S&P 500 Index with Reinvested Dividends

Peak Month Trough Month Loss at Trough Recovery Month Years to Recovery
Oct 2007 Feb 2009 -50.9% Mar 2012

4.4

Mar 2000 Sep 2002 -43.8% Oct 2006

6.6

Aug 1987 Nov 1987 -29.5% May 1989

1.8

Dec 1972 Sep 1974 -42.6% Jun 1976

3.5

Dec 1961 Jun 1962 -22.3% Apr 1963

1.3

Feb 1937 Mar 1938 -50.0% Mar 1944

7.1

Aug 1929 Jun 1932 -83.4% Jan 1945

15.4

Data Source: Morningstar Direct (March 2013).

Unfortunately it may take investors longer than 4½ years to recover from the emotional impact of the financial crisis.

Some investors reacted emotionally and sold out of the stock market, and some may be still sitting on the sidelines waiting for a clear sign of an economic recovery. As you can see from the chart on the following page, those investors have missed out on four years of solid stock market returns, which could have a significant impact on the growth of their wealth.

Stock Market Index ReturnsMarch 2009 – February 2013
Annualized Return (%) Total Return (%) Growth of $1
S&P 500 Index

22.5%

121.6%

2.22

Russell 3000 Index

23.3%

127.0%

2.27

Russell 1000 Growth Index

22.9%

124.4%

2.24

Russell 1000 Value Index

23.2%

126.5%

2.27

Russell 2000 Index

25.7%

144.8%

2.45

Dow Jones US Select REIT Index

36.7%

240.4%

3.40

MSCI World ex USA Index (net div.)

18.1%

91.6%

1.92

MSCI World ex USA Value Index (net div.)

18.90%

97.00%

1.97

MSCI World ex USA Small Cap Index (net div.)

23.30%

127.50%

2.27

MSCI Emerging Markets Index (gross div.)

24.80%

137.80%

2.38

 

Many investors think they will be able to recognize when they can safely get back in to the market. But history shows us that market recoveries often occurred unexpectedly. This is the nature of stock investing. Gains may come in powerful upsurges against a backdrop of discouraging financial and economic news.

As difficult and painful as the financial crisis and Great Recession period proved to be for investors, it taught us some valuable lessons that should help us better navigate through future market turmoil.

For example,

we can now see more clearly that letting our emotions guide the way we invest can have detrimental consequences.  

This may be the clearest demonstration many of us will see in our lifetimes of why we should try to focus not on the short-term gyrations of the markets but on the long-term potential of a broadly diversified portfolio to help us achieve our investment goals.

 

Data Source:  Morningstar Direct (March 2013). Indexes are unmanaged baskets of securities in which investors cannot directly invest. Actual investment results may vary. All investments involve risk, including loss of principal. Past performance is not indicative of future results. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting.

© 2013 LWI Financial Inc. All rights reserved. LWI Financial Inc. (“Loring Ward”) is an investment adviser registered with the Securities and Exchange Commission. Securities transactions may be offered through Loring Ward Securities Inc., an affiliate, member FINRA/SIPC. R 13-096 (Exp. 3/15)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Many investors think they will be able to recognize when they can safely get back in to the market. But history shows us that market recoveries often occurred unexpectedly. This is the nature of stock investing. Gains may come in powerful upsurges against a backdrop of discouraging financial and economic news.

As difficult and painful as the financial crisis and Great Recession period proved to be for investors, it taught us some valuable lessons that should help us better navigate through future market turmoil.

For example, we can now see more clearly that letting our emotions guide the way we invest can have detrimental consequences.  This may be the clearest demonstration many of us will see in our lifetimes of why we should try to focus not on the short-term gyrations of the markets but on the long-term potential of a broadly diversified portfolio to help us achieve our investment goals

 

 

 

 

 

 

 

 

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