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How To Protect Your Investments From Periodic Market Downturns


March 10, 2014

Dear Friends,

With a newsletter title like this one, you may be expecting advice on how to time the stock market, avoid short-term losses, or spot key events that tell investors when to move money to cash or some other investments when things "stabilize". Sorry to disappoint, but you'll find none of these magic elixirs here.

Market timing doesn't work, as we'll explain. And avoiding short-term losses with an investment that can provide solid solid returns is not possible. Instead of using timing tricks, we instead help our clients understand that trying to avoid short-term losses can be more risky to one's financial goals than simply being patient.

Over and over we see talking heads on TV discuss miracle methods to never lose money and always make gains. Over and over investors' fear of short-term loss causes "sit on the sideline" behavior than can be a true death blow to a retirement plan.

Here are some statistics to chew on to help draw conclusions for the future of stock and bond markets:

  • In the 87 years since the start of the Great Depression, the U.S. stock market has been in the positive 62 times, or 71% of the time.
  • The S&P 500 Index has averaged 9.55% returns per year since the beginning of the Great Depression, spurred by U.S. GDP growth.
  • Despite 12 separate market drops of 10% or more in the last 25 years, the U.S. stock market has averaged 10.17% per year in the last quarter century, which would have turned $100,000 into $1,287,727 today.
  • U.S. and International stock markets have rebounded from 100% of past market drops. 100% is a great batting average so we simply view pullbacks as buying opportunities. 

That's the good news - basically markets go up and down regularly, but the stock market has recovered from every single dip, downturn and depression and can provide double digit returns for patient investors.

Now the bad news - many investors try to time the market by moving to bonds or cash when stocks seem scariest or moving into the stock market after seeing a big market run. Trying to time markets like this has proven costly. 

  • According to research firm Dalbar, for the 20-year period ending in 2011, U.S. stocks gained 8.4% per year, but those trying to time the market only earned 1.9% per year during that time.
  • Fidelity recently examined 7 million retirement accounts and found that of those who sold their stock mutual funds between October 2008 and March 2009 (when stocks were scariest), more than 50% hadn't reinvested by June 30, 2011. Those who stayed in the stock market during that period achieved 50% gains, those who sat on the sidelines during the same period gained....just 2%.  

Why are we discussing the failures of trying to time the market? Because even though the U.S. stock market is near all time highs market pullbacks will periodically occur and we want our clients to be prepared.

Our simple advice to truly protect your financial plans from disaster:

  1. Be patient - you already know that investing involves occasional down periods, and some can be fairly drastic. But you also know that the markets have rebounded from every past downturn.
  2. Tune out loud mouthed "experts" who have new methods that can't lose. The only one making money when investors constantly shift directions are brokers, not investors.
  3. Know that buying stocks of good companies at low prices (a.k.a. value investing) has provided better than average returns for patient investors for more than a hundred years.


Benjamin Ebert, CEO



This article is for informational purposes only and should not be taken as instruction or solicitation to buy or sell any security. Investing in securities involves risks that may result in financial losses. Past performance does not guarantee future results. 

The market return statistics cited have been calculated by ECM using return data published by Standard & Poors. More information about these index returns can be found at Standard & Poors website:

A full description of investment advisory fees is supplied in our Form ADV. Performance figures shown here and at are reported according to Global Investment Performance Standards (GIPS) and reflect the inclusion and reinvestment of dividends and other earnings. Performance figures quoted include all fees.