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How quickly they forget…… April 3, 2014

Posted by shaferfinancial in Finance.
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Its 2014 and we are about 5 years since the stock market’s latest swoon [-39% for the S&P 500]. In the intervening years the market has gone straight up with +23%, +12%, 0%, +13% and +32%. Last year we went ahead of the high point in the market before 2008. When I talk to some clients, even some that know better, they scoff at my insistence that 2008 wasn’t an isolated case but a regular occurrence. Since 1950 their have been 10 occurrences of more than a 10% annual loss in the S&P 500. [1957-1966-1973-1974-1977-1981-2000-2001-2002-2008] So over the last 63 years 10 losses of over 10% or 1 for every 6.3 years. Going by decades the 1950s and the 1960s had 1 each, the 1970s had 3, the 1980s 1, none in the 1990s and 4 in the 2000s.

So we know that we will get one sooner or later. Now, I can’t tell you when, but I can predict what will happen to the aggregate of individual investors. Since a vast majority of them are invested in mutual funds they know nothing of the individual stocks they own. This lack of knowledge pushes the general panic we all feel when a down market materializes into overdrive. So what happens [every time in the post mutual fund/401K era] is people panic and sell after the market has crashed, or they have to sell their retirement funds because they get layed off, recent and near retirees bemoan their position and extend their work lives if they can, it becomes big news all over the media which reinforces the panic, and retirement accounts are left devastated.

Then the market goes into its upswing, we see years like last year, +32%, people gain confidence or don’t want to be left out, so they rush back into the market like we are seeing now. Everyone becomes a stock market maven and there are no losers.

I don’t want this to become an alarmist post……it is just an honest discussion of what happens with the stock market cycle. I do question why people want to be on that roller coaster ride? Some feel they have to because they are getting that company match [again]. Some simply don’t know any other way. Some believe Wall Street propaganda that other products don’t work or are expensive or are risky.

But whatever it is, people forget what just happened a couple of years ago.
Human nature is what it is ……psychologist label it recency bias…..it is still scary to watch.
Want off the roller coaster? Call me.

Oh and the last time we went more than 5 years without a down year? An 8 year time period starting in 1982. And that was the only time since 1950 we went longer than 5 years without a negative year. So we are already in an anomalous era.

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