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Financial Opinion and Insights

Market Swings: Good or Bad?

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

It depends.  If you’re a retiree seeking a dependable income stream, it may actually depend on the size of your asset base.  Those with modest portfolios will likely need some long-term allocation to equities simply to keep pace with inflation, while those with very large portfolios may not have inflation issues to worry about – Let’s face it, Bill Gates isn’t worried about inflation.

But, for most us Americans still working in the real world, we’re still trying to grow our assets long-term to provide for a secure future.

For those still contributing to their company retirement plans, market swings can actually be your friend!  Unfortunately, too many plan participants seem to be unaware of the opportunities these swings represent since their contributions can buy more shares during the dips and just before markets recover, as they always seem to have done so far.

The February issue of Financial Planning contained a chart from ICON Advisors that illustrates economic conditions at various market peaks and the subsequent returns.

Here’s a brief sampling from the eighteen periods they cited:

Surrounding Conditions Year Subsequent S&P50052-week return
Post 1929 Market Crash 1929

-9.9%

Depression Market Bottom 1932

40.3%

Pre-Cuban Missile Crisis 1962

19.2%

Recession Bear Market Bottoms 19701974

1982

27.6%

33.5%

19.2%

Post 1987 Market Crash 1987

15.2%

Technology Bubble Break 2000

-12.3%

Recession, Financial Crisis Low 2009

22.6%

European Debt Problems 2010

24.4%

European Debt Problems, Round 2 2011

????

As I indicated, ICON’s table included 18 different market conditions.  The best recovery came after the Great Depression market bottom at 40.3%; the worst came after the terrorist attacks in 2001, at -18.9%.

Their conclusion:  Using the rear-view mirror to reduce volatility may risk long-term underperformance.  Remember, those who are recognized as America’s most successful investors seem to have one thing in common:  They tune-out the `white noise’ of the media and invest in quality for the long term.

Jim

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Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Written by Jim Lorenzen, CFP®, AIF®

February 21, 2012 at 8:00 am