Practicing Patience

Historically, the long-term investor has come out ahead.

Well, Thursday was one of those days … the Dow Jones Industrial Average dropped 358 points to 11,453, its lowest close since September 2006.¹ In the wake of that development, you may be wondering:

1)     What was behind the big drop?

2)     When will things turn around?

3)     Is it time for an attitude adjustment?

It is a good time to address those questions.

What was behind the big drop? You can chalk it up to several factors.

1. A big hit to Citigroup, Merrill Lynch and Goldman Sachs. Their credit ratings were downgraded. Analysts wonder if other global financial firms will face second-quarter writedowns and credit losses.
2. Disappointing outlooks from Oracle and Research In Motion Ltd. (the maker of BlackBerry) and negative commentary from analysts about the outlook for General Motors. GM, Nike, Citigroup and Lear Corp. shares all fell sharply Thursday – in fact, all 30 companies in the DJIA have posted losses this month.²
3. Oil prices briefly rising past $140 a barrel, a consequence of the remarks of OPEC President Chakib Khelil, who apparently told a French TV station that oil futures could range between $150- 170 per barrel this summer.³
4. Continuing indicators of a slowing or crawling economy, in the real estate, manufacturing and service sectors.
5. The highest unemployment rate since 2004 (not all that high in historical terms, but still 5.5% as of May).⁴
6. The perception that the Federal Reserve won’t cut interest rates for the rest of the year (and may even raise them).

When will things turn around? Let’s face it … no one can predict the future, not even the near future. As much as we’d like to be clairvoyant, we don’t know what the next week or month will bring for investors.

We do know that next week brings a plethora of economic data, and if it is better than expected, stocks may perform better. Next Monday, we have the revised University of Michigan/Reuters consumer confidence survey for June. Tuesday is July 1, and on that day, we get news about May construction spending and the Institute for Supply Manufacturing’s June gauge. July 2, we get data on May factory orders. July 3, we get data on June unemployment and wages, and we’ll see if joblessness stays at 5.5% or declines. (Economists polled at briefing.com are predicting 5.4%.⁵)

Also, all kinds of earnings reports are coming up in the near future. When two or three companies meet or surpass earnings expectations, these can be catalysts for a rally, especially when coinciding with positive indicators.

Even with the ups and downs of this year, a bullish, opportunistic mindset still lives on Wall Street. Investors in Europe and Asian markets, while concerned about the U.S., are still witnessing and benefiting from impressive global economic growth.

So far, 2008 has been a mediocre year for the stock market – but half the year remains, with the potential for an upturn. If we are in a recession – and many economists have all but concluded so – recessions have historically lasted 18 months or less, sometimes much less. In other words, don’t expect this downturn to last forever.

Is it time for an attitude adjustment? You know, the media tends to encourage investors to think in either/or terms – bull or bear, rally or slump. Euphoria or panic. I would urge you to look beyond all that. Keep your eye on your long-range financial objectives, not the latest headline. There will always be another “latest headline”, and if you base your investment strategy on the headlines, the chances are you will end up confused and astray from the principles that you are building wealth with.

The markets have bad days. But historically, the long-term investor has come out ahead. Look at the closing numbers from June 30, 2003: DJIA, 8985.44; NASDAQ, 1,622.80; S&P 500, 974.50. Since then, the big three indices have each gained between 27-43%.⁶ That’s a great argument for persistence and patience. Hang in there. We’ll get through this latest storm and see some sunshine again.

Citations. ¹ bloomberg.com/apps/news?pid=20601103&sid=anO8y9ss8oJQ&refer=news

² bloomberg.com/apps/news?pid=20601103&sid=anO8y9ss8oJQ&refer=news

³ money.aol.com/news/articles/_a/stocks-tumble-as-more-bad-economic-news/n20080626170009990035

⁴ csmonitor.com/2008/0625/p01s10-usec.html

⁵ dailyfx.com/calendar/briefing/

⁶ money.cnn.com/quote/historical/historical.html?pg=hi&close_date=7%2F1%2F03&mode=add&symb=DJIA

⁶ money.cnn.com/quote/historical/historical.html?pg=hi&close_date=6%2F30%2F03&mode=add&symb=COMP

⁶ money.cnn.com/quote/historical/historical.html?pg=hi&close_date=6%2F30%2F03&mode=add&symb=SPX

.

Comments

[Financial Planning Demystified]

Can't agree enough...

Whenever there is a fall, the journalists quote one of the several oft-used reasons.

And whenever there is abig jump, again, they quote some of the same-old reasons.

The bottom line is that as investors, we should think long term, and should't get purturbed by day-to-day movement of the stock market.

[Patrick]

Spencer, interesting post. Would you be interested in syndicating your content on the home page of my site? It's an online community of finance professionals ( http://www.wallstreetoasis.com ). I could add an RSS feed that will allow me to promote your blog posts to my home page (when i think it will lead to a good discussion and/or is appropriate), but I wanted to make sure you were comfortable syndicating first. The syndicated post would have a link back to your original post. Thanks, Patrick (you can reach me at [email protected] if you have any questions).

Also, if you are willing to provide a link to wallstreetoasis.com that would be much appreciated.