Long-term Investors Can Persevere

By Ernie Ankrim, Chief Investment Strategist
Russell Investment Group
Global Leaders in Multi-Manager Investing

July 26, 2006

Downturns — or corrections — in the markets come with the territory when you invest in stocks. So it is that you have to stick around during the bad times to enjoy the good times.

Should stocks fall 5 percent or even 15 percent, you need to hang in there if you want the opportunity to experience the higher returns of about 25 percent that the market historically has shown on occasion.

Long-term investors sometimes tend to forget this fact of stock-investing life. Using the Ibbotson services on stocks from 1926 to the present, returns on stocks have always been positive over 10 years. There is, of course, no guarantee this trend will continue, but if the historical pattern holds stocks eventually will come out ahead.

In the recent downturn, from the peak on May 5 until June 20, the market fell 6.06 percent, as measured by the Russell 3000, in about six weeks. The market has lost a lot more than that in some months.

Yet some investors reportedly fear that the downturn might continue and be severe — such as that we experienced when the Russell 3000 fell 26 percent from March 27, 2000 to September 21, 2001. They don't want to lose more money. Also, they might be listening to market commentators who talk of a repetition of the events of that time. These commentators talk of technology stocks running wild and the bull market being "long in the tooth," whatever that may mean.

So they are selling their stocks.

Today's Market Tells a Different Story
But today's market does not look anything like it looked in 1999 and early 2000 when the bull market was overbought and investor exuberance drove stocks up way beyond the companies' earnings growth potential.

In the last three years actual earnings have almost been right on expectations. It is clear that the market expectations on earnings are not running away from reality as was typical in the euphoric markets of 1999.

Nor is there any reason to conclude that the bull market has lasted too long. The August 1982 to August 1987 bull market lasted 61 months and stocks rose 29 percent a year over that time, as measured by the Russell 3000 Index. The January 1991 to March 2000 bull market lasted 111 months, during which time the market rose 18 percent a year, according to the same measure.

The present bull market is average when judged against those two examples. From March 1, 2003 to April 30 this year, stocks as measured by the Russell 3000, rose 19 percent a year for 37 months.

I don't see anything to indicate that either the market or the prices being paid for assets are representative of conditions setting us up for real serious declines. Companies are making money; but, if anything, stocks are not gaining enough to reflect that.

There will be disappointments for sure. But this is not 1999 when some technology stocks were trading at 350 times earnings; now extreme valuations are below 100 and the average valuation for the Standard & Poor's 500 stocks is about 15, which is close to the historical average.

Weather the Ups and Downs
Make sure you don't join the pack crying fear and running for the exits. You might regret it. You should remain relaxed through the downturns.

Remember, this is the normal way in which markets act. They go up and they go down. Living through the downturns is modestly painful, but in the long run all that counts is to stay invested across a wide variety of assets, such as U.S. and international stocks and bonds.

This is the reason you own stocks — not to go through pain, but so you will get a potentially higher return from equities over time. Do not allow these dips to distract you from your long-term strategy.

When things look really bad, it often means the worst is over. At times like these, we need to turn our attention away from the risk we are taking investing in stocks to the opportunity that might be there.

The only time I am nervous about investing in stocks is when people think there is nothing wrong with investing in stocks and that they never will go down again.

If anything, dips in the market might be your opportunity to invest at lower prices. It is in environments like this that long-term investors in the past have been able to enhance their returns.