{"id":254,"date":"2012-11-21T17:20:13","date_gmt":"2012-11-21T17:20:13","guid":{"rendered":"http:\/\/www.wallstreetandkstreet.com\/?p=254"},"modified":"2012-11-28T16:47:41","modified_gmt":"2012-11-28T16:47:41","slug":"why-you-need-an-investment-advisor-part-ii-the-unthinkable-is-normal","status":"publish","type":"post","link":"https:\/\/www.wallstreetandkstreet.com\/?p=254","title":{"rendered":"Why You Need an Investment Advisor, Part II &#8212; The &#8220;Unthinkable&#8221; is Normal"},"content":{"rendered":"<p>Why is it so difficult to stay fully invested in stocks in a disciplined, rational manner, without participating in manias or selling at the bottom?\u00a0 Because, even during bull markets, <strong>lengthy periods of stable, normal economic growth are actually extremely rare<\/strong>.\u00a0\u00a0 \u201cUnthinkable\u201d events occur on a regular basis.\u00a0 Consider stock market history over the past four decades:<\/p>\n<ul>\n<li><strong>1973<\/strong>:\u00a0 Commodity prices soar and oil prices quadruple as OPEC embargoes oil during the Yom Kippur War.\u00a0 Prices of the high-PE \u201cnifty fifty\u201d growth stocks collapse.<\/li>\n<li><strong>1980<\/strong>:\u00a0 \u00a0CPI inflation is 13.5% and interest rate soar to 20%.\u00a0 Economists believe inflation will remain elevated for years.\u00a0 Boom times in Texas.<\/li>\n<li><strong>1983<\/strong>:\u00a0 Instead inflation falls to 4% by 1983. With commodity prices and corporate pricing power collapsing, the profitability of many big U.S. industrial firms implodes.\u00a0 Mexico and other \u201cLDC\u2019s\u201d effectively go bankrupt, threatening New York Banks.\u00a0 By 1990 all the major banks in Texas disappear.<\/li>\n<li><strong>1987<\/strong>:\u00a0 Stock prices fall 22% in a day and more than 30% over just two months.<\/li>\n<li><strong>1990<\/strong>:\u00a0 The real estate and LBO boom of the 1980s ends as Saddam Hussein invades Kuwait in the summer 1990. The ensuing recession nearly precipitates a financial crisis.<\/li>\n<li><strong>1998<\/strong>:\u00a0 The \u00a0Asian financial crisis causes a global financial panic that destroys one of the biggest hedge funds, Long Term Capital Management. Stocks plunge and the junk bond market temporarily seizes up.<\/li>\n<li><strong>2000<\/strong>:\u00a0 A five-year stock market boom culminates in a tech bubble that collapses in 2000-2001; stocks don\u2019t bottom out until October 2002.\u00a0 (The tech crash was even more costly than the 1929 crash because many dot.com\u2019s and other widely held issues effectively went to zero, including Enron, Worldcomm, Lucent, Nortel and\u00a0Sun Microsystems.\u00a0 The most popular stocks in the 1920s, such as RCA, GM, Chrysler, GE, and Allied Chemical, lived to fight another day.)<\/li>\n<li><strong>2001<\/strong>:\u00a0 Al Qaeda destroys the World Trade Center and attacks the Pentagon, starting a protracted global \u201cWar on Terror.\u201d<\/li>\n<li><strong>2008<\/strong>:\u00a0 A housing bubble, promoted by Democrats and Republicans alike, leads to a financial crisis that nearly destroys the global banking system in 2008-2009.<\/li>\n<li><strong>2009<\/strong>:\u00a0 Europe\u2019s financial system is crippled by a protracted crisis caused by European socialism (too much government, not enough growth), a recession that shatters housing bubbles in certain countries, and a dysfunctional currency system.<\/li>\n<\/ul>\n<p>That is ten crises in forty years, or one every four years. No wonder it\u2019s hard to hang on to stocks.\u00a0 But good businesses managed to prosper nonetheless; the S&amp;P 500 rose at a 6.3% pace from year-end 1972 to year-end 2011, the average dividend yield was 3.0%. Here are the 40-year stock price CAGRs of a few successful companies:\u00a0 McDonald\u2019s 10.0%, Caterpillar 7.2%, Wal-Mart 20.2%, Coca-Cola 8.4%, GE 7.1%, 3M 5.5%.\u00a0 The 20-year stock price CAGR was 20.5% for Starbucks, 9.5% for Intel, 12.2% for Microsoft, and 11.9% for Nike.\u00a0 The total returns of these stocks were even higher, taking dividends into account.\u00a0 Of course, not all companies are as successful as these, which is why you should keep your winners and sell your losers.<\/p>\n<p>The \u201cUnthinkable is Normal\u201d syndrome underscores why equity investors need a safe cash cushion, for both practical and psychological reasons.\u00a0\u00a0 In a perceptive article on the history of stock market returns, Ben Inker of GMO points out that one reason why stocks offer investors an attractive 5.9% real long-term return is that stocks tend to collapse at the most inopportune times \u2013 during panics, wars, and recessions, when investors most need the money. Which is why buying stocks on margin is dangerous and unwise.<\/p>\n<p>Copyright Thomas Doerflinger 2012.\u00a0 All Rights Reserved.<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Why is it so difficult to stay fully invested in stocks in a disciplined, rational manner, without participating in manias or selling at the bottom?\u00a0 Because, even during bull markets, lengthy periods of stable, normal economic growth are actually extremely &hellip; <a href=\"https:\/\/www.wallstreetandkstreet.com\/?p=254\">Continue reading <span class=\"meta-nav\">&rarr;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[57,23,8,56],"class_list":["post-254","post","type-post","status-publish","format-standard","hentry","category-uncategorized","tag-financial-panics","tag-investing","tag-stock-market","tag-stock-market-history"],"_links":{"self":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts\/254","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=254"}],"version-history":[{"count":5,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts\/254\/revisions"}],"predecessor-version":[{"id":275,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts\/254\/revisions\/275"}],"wp:attachment":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=254"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=254"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=254"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}