Fear of the Future Or Fear of the Present?

While driving in my car recently, I caught a radio talk show that had as its featured guest, a therapist.  What caught my attention most was the therapist’s definition of anxiety.  The therapist told the host that her definition of anxiety is “the fear of what could happen in the future.”

Even though this radio talk show (let alone the therapist) had nothing to do with investing, I thought that this was very apropos for investors, especially right now.  The markets seem to be in great turmoil.  And many investors have anxiety right now and don’t konw where to turn because they seem to be afraid of the future.  But as I have thought a great deal about this, I have realized that most investors do not so much have a fear of the future, but a fear of the present.

Stay the course, but why?

So far this year, the S&P 500 has declined by more than 11.5%.  A recent survey of investment advisors (perfomed by Charles Schwab & Co. Inc.) showed that 41% of those surveyed said that the S&P 500 Index will fall in the next six months (the article reporting this survey failed to mention that the other 59% did not feel that negative).  Credit worries continue to escalate as one of the largest mortgage companies sparked fears that the lender may go bankrupt.  The US dollar hit a new low against the Euro when the European Central Bank played down the idea of a cut in rates.  Not only is the dollar dropping in value, but now there seems to be fears of inflation as food and oil prices continue to climb.

With all of these negatives, why should we, as investors “hang in there” as we have been told so many times before? “Because I said so” isn’t enough (nor should it be).  For the right answer, we need to know a little bit about how the markets have acted in past.

First of all, even the “bad” times were not as bad as they seem.  I have heard it said that we “will likely never see returns again like we saw in the 1990s.”  (Everyone remembers how the 1990s ended, but do you realize that the decade actually started out with a recession?)  When you look at the S&P 500, the 1950s actually outperformed the 1990s.  Why is this important?  Because we do not know what tomorrow will bring.  It is very possible that we will see returns similar to the 1990s, and possibly even greater - especially with the increase in global capitalism.

For comparison, here is a list of the annualized performance of th S&P 500 in each decade since 1930.  There is only eight years of data for this decade so far; the annualized return from 1926 through 2007 is also included.

S&P 500

1930 -1939     -0.05%

1940-1949     9.17%

1950-1959     19.35%

1960-1969     7.81%

1970-1979     5.86%

1980-1989     17.55%

1990-1999     18.21%

2000-2007     1.66%

1926-2007     10.36%

The S&P 500 has had almost as dismal of a performance in the first 8 years of this decade as the entire decade of the 1930s (see The Great Depression).  Why is this important?  Because the last 5 years (January 2003-January2008) the S&P 500 has averaged over 10% per year!

As investors, we seem to have short memories.  It is quite a phenomenon, really.  Because of the tremendous returns of the past five years, we seem to forget that the first 3 years of the decade (2000-2002), the S&P 500 had an annualized return of -14.55%!  (This includes the Tech Bubble, 9-11 and several major corporate scandals.)

S&P 500 Returns

2000     -9.1%          1930     -24.90%

2001     -11.89%      1931     -43.35%

2002     -22.1%       1932     -8.20%

2003     28.69%      1933     53.97%

2004     10.88%      1934     -1.43%

2005     4.9%          1935     47.66%

2006     15.8%        1936     33.92%

2007     5.49%        1937     -35.02%

2008     -11.5%      1938      31.14%

2009     ???            1939     -0.42%

Right now, it does look pretty bad.  But it is rarely (if ever) as bad as the “experts” are telling us it is.  If handled with the correct perspective, what seems to be major financial concerns, are actually little bumps on the road to long-term prosperity and growth of wealth.  The importance of a broadly diversified portfolio can not be overstated.  It is of paramount importance to use science and reason rather than emotion and anxiety to make proper investing decisions.

Telling investors to “have faith in the future,” as I have told you before, seems a bit hokey at times, I am sure.  When we see our hard-earned savings decreasing in value, it is hard not to worry and wonder if “staying the course” is the right thing to do.  But having faith in the future is what investing is all about.  When we invest, we are buying stock in companies whose values we believe are going increase in the future.  Our faith in the future should always out-weigh our fear of the present.

There seems to be a dark shadow over the capital markets right now.  But what we must remember is that when there is a shadow, it means that there is light.

To your success and faith in the future of the capital markets!

Mark J. Aubry, CEA, WMS

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