Another Year, Another Market Crisis (So Think Long-Term)

Suzanna De Baca -- Expert Business Source, 3/21/2008 8:30:00 AM

This week while researching what market analysts and Wall Street gurus had to say about the state of the market, I came across a Forbes.com article in which various experts weighed in on whether we were at the bottom of the market cycle. In the piece, a panel of experts commented on last year’s high valuations and earnings growth and opined that we’d indeed reached a bottom.  One mentioned, “Now stocks are down, expectations are down, valuations are down, fear is up and the money supply growth has already started to take off along with the Fed cuts.” 

It was the money supply quote which puzzled me and led me to glance at the date of the article; I was startled to see that I was not reading commentary from this week, but an old article from July 2001. The overall situation, the language, and the sentiment were so similar that it could have been lifted from this week’s newspapers. 

“Another year, another market crisis!”  I thought to myself with a sigh that can only come from being a “seasoned” financial professional (I prefer that term to “middle-aged”).

Once in cliché-mode, a few other axioms came to mind: The more things change, the more they stay the same. What goes up must come down.

These clichés exist for a reason: historical data shows that the market (like life) goes in cycles. So why are we so surprised when it does?

Many investors and consumers are touting this as the worst market we’ve ever, ever, ever been in. Some speculate this is worse that the early 2000s because of the banking debacles and the Fed intervention. Some are using the “D” word, implying that the economy is as bad as it was post-1929. Is this true? Is this the worst crisis of all time?

Having lived through the Farm Crisis, the S&L Crisis, the Oil Bust in Texas, the Real Estate Crisis of the early 1990s, the Tech Bust of the early 2000s, and various personal crises of my own, I have come to this somewhat Zen conclusion: it doesn’t matter. 

While being in crisis feels terrible, crises also have a beginning and an end. In my opinion, what matters is thinking long-term. What matters is seeing beyond the crisis and trying not to react impulsively out of fear, greed, or paranoia. 

For an investor who is on a 1 year cycle, market volatility matters; for an investor who is looking 10 years out, history shows us that market volatility evens out and the market reverts to a mean. Even if you’re about to retire, if you have had – or can have – a perspective of sticking to your program, chances are you’ll be fine in the long run. Those investors who got hit back in 2000 recovered and enjoyed a several years of a Bull market.

As the 2001 Forbes.com panel observed, an analysis of past post-war recessions reveal that these downturns typically last an average of 13 months, with the market tending to bottom about nine months into it. While it is possible that this current period of economic woe may last longer, who really knows?  We do, however, know that it will end.  What goes down, must go up.

Those who do not panic tend to do better in the end than those who do.  So what are the lessons?  Market cycles will continue.  Thinking long-term allows you to ride out those market cycles and potentially even benefit from them. To continue with the clichés:  Buy low, sell high.  And don’t change horses mid-race.

Suzanna de Baca is President of Private Capital Solutions Group.  She is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS), 7 Hanover Square, New York, NY 10004, (888) 600-4667.  Securities products/services and advisory services are offered through PAS, a registered broker/dealer and investment advisor. Private Capital Solutions Group is not an affiliate or subsidiary of PAS.

PAS is a member FINRA, SIPC.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal or investment advice. Although the information has been gathered from sources believed reliable, please note that individual situations can vary, therefore the information should be relied upon when coordinated with individual professional advice.