Money Matters: Investment performance after a recession

Last week I discussed that once the market had hit bottom, it was okay to start investing again. As you all know, the bottom is something that is confirmed by the rearview mirror, rather than something that can be known at the time. And to paraphrase Warren Buffett - when others are fearful, it is time to be greedy. This is true, provided you have at least some confidence the American people and leaders can recover from even the toughest recession.

The question now may be how much to invest and when? It is best to remember, the markets are fickle; and just when you think it may be safe to step all the way in, they can drop another 200, 300 and these days, 500 points or more. While many professionals are banking on the flow of the TARP (Troubled Asset Relief Program) funds to stabilize the markets, there are just as many anticipating the markets to go through one more hand-wringing day and a new closing low. Presently, the close on Oct. 10 where the Dow Jones Industrials ended the day at 8,451.19 is the current closing low. During that day, it was down as low as 7,882.51. The S&P 500’s current low was 848.92, which occurred Oct. 27.

As an active investment advisor, I receive an endless supply of investment reports. One providing excellent information was from American Funds on “Investing through Recessions.” This report covered the last ten U.S. recessions from June 13, 1949 through Sept. 21, 2001. For nine of the ten recessions, within one year of the bottom the S&P 500 recovered a minimum of 28.8% to a maximum of 57.7%. Thus, selling out of the market during a recession may protect those assets from further declines, but may also cause those assets to miss the recovery. This past Tuesday’s move of the S&P 500 up 91.6 points or 10.8% in a single day clearly shows timing the market can be very difficult, if not impossible. While we may not have seen the absolute lows, the markets can recover their losses in a short amount of time; and in many cases, the majority of the recovery may occur in only a few key days during the year following the low. Trying to pick those key days to be in the market is impossible; no crystal balls exist. This is why many investors experience performances far less than the funds they are in or the indexes. They sell when the fear gets the best of them and only come back into the markets when a substantial amount of the recovery has already occurred.

Due to the severe declines most investments have incurred since the market highs of last October, we may be poised to see the highest recovery percentages of the last ten recessions. For the markets to recover to the highs of October 2007, the S&P 500 will need to rebound to 1,565.15 or 84.37%. Even if two or three years are required to reach this level, double digit returns will be achieved. Now I am not saying dive into the markets. But, purchasing select mutual funds or stocks may provide higher than normal returns during the next several years. It may be these higher than average returns which will be crucial for your investments to reach and surpass past levels.

While recessions are brutal and the loss of investment value can be disheartening, they also create incredible opportunity. Make sure your portfolio is poised to make the best of these opportunities in the market.

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