A Historical Perspective
There’s no doubt that world crises of the magnitude of
the September 11 attacks put significant stress on the global economy,
financial markets and international political stability. While past
performance is no guarantee for the future, consider these historic
stock market comebacks:
Pearl
Harbor. In
the five months following the attack on Pearl Harbor — which ushered
in the United
States’ involvement in World War
II — the S&P 500 declined almost 16%. However, by the time the
war ended in 1945, the index had advanced 63% from its level on December
7, 1941.
Korean War. On June 26, 1950, the day after North Korea invaded South
Korea, the S&P 500 fell 5.38%. When the Korean War ended in July
of 1953, the index was almost 30% above its level the day of the invasion.
Iraq War. Considering
a more recent example, from March 19, 2003 — the day the United States
and its allies launched a military campaign against Iraq — until March
31, 2003, the S&P 500 fell 2.96%. One year after the initial invasion,
the S&P 500 was 24.88% higher than it was on March 18, 2003.
[Historical market data is based on daily price returns,
excluding reinvestment of dividends, for the S&P 500. Past performance
is no guarantee for future results. Indexes are unmanaged and cannot
be invested into directly.]
Coping With Uncertainty
Dealing with crises requires more than just a historical
perspective. You should also consider these suggestions:
Practice buy-and-hold investing. The only certainty about the stock market
is this: It will always experience ups and downs. That’s why it’s
important to keep emotions in check and stay focused on your financial
goals. A buy-and-hold strategy — making an investment and then holding
on to it despite short-term market moves — can help. The opposite
of buy-and-hold investing is market timing — buying
and selling investments based on what you think the market will do
next. Market timing, as most investment professionals will tell you,
is risky. If your predictions are wrong, you could invest when the
market is on its way down or sell when it’s on its way up. In other
words, you risk locking in a loss or missing the market’s best days.
Talk with your financial advisor before you act. He or she can help you separate emotionally
driven decisions from those based on your goals, time horizon and
risk tolerance. Researchers in the field of behavioral finance have
found that emotions often lead investors to read too much into recent
events even though those events may not reflect long-term realities.
With the aid of your financial advisor, you can sort through these
distinctions, and you’ll likely find that if your investment strategy
made sense before the crisis, it will still make sense afterward.
As experienced market watchers will tell you, time may
just be an investor’s greatest ally. Use it to your advantage by sticking
to your plan and focusing on the future.
To have your question answered, contact John
Petrick at (310) 445-2504 or e-mail him at john.petrick@lpl.com .
This article is not intended to provide specific advice
or recommendations for any individual. Consult your financial advisor,
for specific advice. Past performance is not an indication of future
results. John Bennett Petrick and the representatives of Perennial
Financial Services are registered representatives with and offering
securities through Linsco/Private Ledger (LPL) Member NASD/SIPC.
