Maintaining perspective

The markets seem to be showing a certain pessimism lately, which makes it difficult to maintain our perspective and to keep from complaining that our investments have performed poorly over the last quarter or even the last year. It becomes especially hard when we hear about a daunting gauntlet of risks that includes the unforeseen – an unnerving terrorist strike in India, higher oil prices, the shattering of Mideast peace hopes (again!) or yet another interest rate increase that could lead to a recession.

“Why have these investments performed poorly over the last quarter? What bearing will this have on my future? Will it keep getting worse?” These are the uppermost concerns in investors’ minds. Their impulse may be to make a change.

Keep positive
Part of the reason for investor pessimism is the simple human tendency to extrapolate any current phenomena. If inflation is high for a few quarters, it will always be high; if low it will always be low. It is the same with gold, terrorism, and interest rates – pick your misery.

In a market that has been generally rising for the last couple f years, punctuated by brief declines, a downtrend for half a year seems incomprehensible and shocking. As a general rule, an investor who is unable to understand what’s going on and to keep things in perspective is most susceptible to pessimism. Negativity seems to be a product of our inability to get beyond the present. The real time coverage of markets by CNBC, ROBTV and other actors in the Short Attention Span Theatre of the Air has worked to squash our sense of perspective, and ultimately eliminate it.

We’ve seen it before
The media has no interest in investment reality, which is long term and goal-focused rather than market-focused, and rarely if ever changes. This time it’s no different – we’ve experienced high oil prices, gold prices and interest rates, bombings, Mid-East trouble before – and the markets withstood them all.

The truth is that success comes from having a portfolio that meets our investment objectives and goals; a portfolio diversified by manager, style and geographic region, constantly maintained to that allocation. We then have to ignore the media and stick to our investment plan. Our intense interest in short-term events distorts our perspective. Financial decisions become reactions to the fads or fears of the moment, not well-planned actions.

History lessons
The market has sent us many messages in the last few years, chiefly that it can be extremely volatile. It can be charming and seductive at some times, but mean and capricious at others. It can leave you uncertain if you’ve been shot, stabbed, snake-bit, or stepped on. Everything we know about the markets comes to us through the classroom and laboratory of history. So although past performance doesn’t offer a guarantee of future success,we should not ignore its lessons. With that in mind, let’s look at the example of economics and history in relation to understanding our expectations for positive returns. Here are some events from history and how the market, based on the Dow Jones Industrial Average, reacted and progressed upwards:

As the famous investor Benjamin Graham says:
In the short run, the market is a voting machine but in the long run, it is a weighing machine

The lesson here is that we have to look beyond these unstable times in the market and realize that perspective is the ultimate antidote to today’s pessimism.

Year DJIA Event(s)
1939 150 War in Europe
1945 193 Post War recession
1947 181 Cold War begins
1949 200 USSR explodes atomic bomb
1950 235 Korean War
1953 281 USSR explodes hydrogen bomb
1956 499 Suez Canal Crisis – Israel versus Syria, Egypt, Jordan
1963 763 JFK assassinated
1966 786 Vietnam War escalates
1967 850 Six Day War – Israel versus Syria, Egypt, Jordan
1973 851 Energy Crisis – Yom Kippur War – Israel versus Egypt and Syria
1979 839 Oil Skyrockets, 10% + unemployment
1980 964 Interest Rates hit all time high, high Gold
1982 1047 Worst recession in 40 years, debt crisis
1987 1939 The Crash – Black Friday, Israeli Intifada #1 – Israel versus Palestine
1990 2634 Gulf War, worst market decline in 16 years
1991 3169 Recession
1998 9374 The Asian Crisis
2001 10021 Recession, Intifada #2 – Israel versus Palestine, World Trade Centre Attack
2003 10454 War in Iraq
2005 10718 Rising oil, commodities

Source: DJIA – Dow Jones Industrial Average

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