The Storm Before The Storm (As opposed to the calm)

In reference to the old adage, “the calm before the storm” – the stock markets tend to have good storms right after the bad storms. By this I mean that equity markets have a tendency to rebound fairly strongly after adverse market conditions.

Unfortunately, many investors bail out of their investment portfolio strategies during the bad storms and forego the market appreciation while watching from the sidelines. Of course, it can be very difficult watching your portfolio see-sawing back and forth so I thought I would ask Russell Investments for permission to post a fantastic chart they have that might help you “batten down the hatches” and focus on the long term…

(Note – you can click on the picture for a larger version. For email subscribers, please click here to view the photo if it does not appear.)

Many thanks to Russell Investments Canada Limited for permission to post this.

Preet Banerjee
Preet Banerjee an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 5 comments
  • Michael James

    I like this chart. It really shows how markets tend to rise more than they fall. It can be very dangerous to jump out of the market to avoid one of the small red blocks because you might miss one of the big green blocks.

  • TKO from Ontario

    Brilliant find Preet!

    Now this is what I needed to see, nothing like a nice graph to start the day. It’s been said many times before that markets over time will go up and blah, blah, blah… This proves that a picture is indeed worth a thousands words.

    These choppy markets make for an emotional roller coaster, surely not for the fait of heart. The graph reinforces the importance of staying invested and maybe even some dollar cost averaging. Only those with a solid plan and discipline will profit from equities in the long term.

    Preet, would you have any info on what day of the week it would be best to set up weekly fund purchases? Currently I’m doing it every other Thursday but I’ve a hunch that weekly might be a better frequency.

    Although timing the market is said to be a poor investment strategy, I’m running a little ‘Buy when there’s blood in the streets’ experiment. I’ve been buying TD eFunds CDN Index in $100 lots everytime TSX dips by >150 points. YTD this strategy is up by 4.2% against the index. I want to accumulate enough funds to buy 1 share of baby BRK.

    Cheers to your financial health,

    TKO from Ontario

  • Preet

    @Michael James – so true. I think people should have this and an Andex chart handy at all times! :)

    @TKO – thanks for the kind words. Peter Lynch found that the the high point versus the low point of the year for systematic annual lump sum contributions resulted in no more than 1% difference over very long periods of time. Basically, the extra time and hassle trying to figure it out probably isn’t worth it, and statistically your odds of doing so are poor.

    Most important, make it automatic and regular. Over the longer periods of time, if you believe that markets go up then you could actually make a case for borrowing with a term loan, take the proceeds to invest NOW and this will result in the lowest adjusted cost base over thirty years (or whatever long time period you choose, but it has to be long). Even after factoring in interest on the loan. Think of this as taking all your $100 contributions and adding them up to put them all in now. Your cost to do this would be the interest, but the capital appreciation and compounding over time would make this statistically ideal. Of course, there is the chance that markets are flat over long periods of time, no one knows for sure. Most people couldn’t handle doing something like that.

    Your ‘buy when there is blood’ is easier in choppy markets, but you may have underperformance in a strong bull market. Which from the chart is more often than not! :)

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