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More proof of the wisdom of passive investing. Zero Alpha Group looks at data from four bear markets to show the danger of missing out on critical early months of market recovery.
For investors who are not invested patiently for the long-term, it’s the big one that usually gets away – the crucial early weeks and months of profits as the market goes from bear to bull, according to a warning issued today by financial experts from Texas, Virginia and Washington State. New data from Savant Capital Management shows that investors who missed the first three months of four market recoveries between 1973 and 2002 lost between 8 and 17 percent of profits between the bottom and the next market peak.
Organized by the Zero Alpha Group, the cautionary note was sounded today by Steven Lugar, CFP®, managing director and portfolio manager, Beaird Harris, Dallas, TX; Glenn Kautt, CFP®, EA, AIFA, president, The Monitor Group, Inc., McLean, VA; and Scott Sarber, CFP®, vice president, Petersen Hastings Investment Management in Kennewick, WA. All three firms and Savant Capital Management, of Rockford, IL. are members of ZAG, an international network of independent investment advisory firms that manage a total of more than $7 billion in assets.
Savant Capital Management looked at Ibbotson data for recoveries from four bear markets. The firm found the following:
1973-1974 – 42.6 percent total decline – 85.9 percent total subsequent gain until next peak – 9.4 percent of the market upturn took place by three months from the bottom.
1987 – 29.5 percent total decline – 64.9 percent total subsequent gain until next peak – 17.2 percent of the market upturn took place by three months from the bottom.
1990 – 14.7 percent total decline – 42.8 percent total subsequent gain until next peak – 14.2 of the market upturn took place by three months from the bottom.
2000-2002 – 44.7 percent total decline – 108.4 percent total subsequent gain until next peak – 8.4 percent of the market upturn took place three months from the bottom.
Steven Lugar of Beaird Harris, Dallas, TX, said: “Investors who are ‘fishing for the bottom’ today before they dive back into the market stand to lose big if they are not invested immediately after the market hits bottom starts heading back up. Those profits are gone for good to market timers who miss the boat on them. The problem for short-term investors is that there is no way to know until it’s too late when the bottom is reached and when the early profits are gone for good. If you aren’t invested, you are out of luck.”
Glenn Kautt of The Monitor Group, McLean, VA, said: “These data should be a rela wake-up call for investors out there who are either ‘hiding’ cash or still sitting on the sidelines in today’s turbulent markets. The reality is that the market always recovers, so it’s futile and quite often very costly to pursue an active investment strategy when a patient long-term approach allows you to sleep at night and enjoy the benefits of every percentage point of the recovery from a bear market.”
Scott Sarber of Petersen Hastings Investment Management in Kennewick, WA, said: “Missing out on the early upswing in a recovering market is one of the big reasons why so many investors get frustrated about not seeing the kind of long-term profits they expect. They don’t understand that being out of the markets during the wrong handful of weeks and months can rob them of a huge part of the gain when the markets bounce back. From our standpoint, it all comes down to the reality that investors without a game plan rarely win. Experience teaches us that financial success is found only in a disciplined process.”
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