Let's examine the LT graph of the S&P500, one of the world's leading market indices.
Segment 1 - The Traditional Market
The period from 1950 - 1995 was a period of consistent upward growth, with little and smallish corrections. The largest correction was in 1987 with a 23% correction, not very big by today's standards. Internationalization had yet to set in and markets were probably quite insular. Consistent growth in the market was probably due to technological advance, improvement in efficiency, basically real growth.
This was a period where you could truly say 'In the long term, markets are on an uptrend'.
Segment 2 - Today's Market
Are today's markets truly the same?
Add in usage of computers, financial derivatives, market interdependence and the following occurs:
- Trading volume has increased
- Volatility has increased
- Magnitude of movement has increased
- Market cycles have shortened (Avg 8 years)
- Largest correction 47%
Implication
Can we really afford to blindly trust in the long run?
If an investor had bought into the market at point B1/2 or towards it, he would have waited 5 years to merely break even.
Have you ever bought at the upper end of the market (towards point B) only to see the value of your stocks fall, then find yourself saying 'It's okay to have paper losses, because I'm a long term investor'?
Well in theory you aren't wrong, markets still have their up cycles and you could probably make your money back if you have a long enough investment horizon. But we're not putting money into the stock markets just to break even right?
Action Plan
While we can still maintain a long term approach, we need to adjust our investment strategy to today's market. Look at where the market is today (Point B3) and decide for yourself if this is a secular bull run like what some people think, or whether the market will correct.
For me, i'm just building my investment fund and waiting for the right time to apply the Big Bucks Method.
