Monday, March 23, 2009

Stock markets up over 5% today, 20% in the last couple of weeks. What does it mean?

Greetings.

Stock markets are up over 5% today, 20% in the last couple of weeks. What does it mean? Let me write about what we do know, and what we don't know.

We do know--

--That investors--both individual and institutional--have cash they want to grow by investing in the stock market. A 5% gain on the markets today proves that investors will put money back into the market when they find a trigger that creates optimism. This need to grow money will be one factor that will bring the recovery in stock markets.

We don't know--

--Whether the last couple of weeks are the beginning of the recovery. They might be, but we don't know. Just as the end of bull [good] markets cannot be spotted in advance, the end of bear [bad] markets is not seen in advance. It's only in the rear-view mirror that we will know that the bear market hit its bottom on such-and-such a date.

We do know--

--That investors who wait for a sign that the bear market is over will miss the start of the recovery. There are two reasons for this: [1] The end of a bear market is not announced in advanced. [2] Growth in the stock market happens on just a few days when the market makes a powerful push upwards. Let me elaborate on this second point because it is very significant to understanding how stock markets really work. Consider this--

--Take the example of the US stock market [S&P 500] between 1993-2007 [that's 15 years or 5475 days]. An investor who stayed invested in that market for those 5475 days grew his money at 10.5% per year. But the remarkable thing is this: if the investor missed the best 30 days during those 15 years, he would have grown his money at only 2.2% per year. And if he missed the best 60 days, his return was negative!

By far, most days on the stock market are inconsequential. The growth in the market is delivered only on those rare days. If you miss those days, you miss the growth. So for money you've already invested, patience and staying invested are essential. If you have cash on the sidelines that you want to grow? Take advantage of this bear market by investing before it's over, not after.

Cheers!

Tom