Quarterly Thoughts – Q1 2009

That’s one “mean reversion!” If historical 10-year average cycles are any predictor, now is not the time to abandon long-term strategies (see chart). The response to excess in the form of the dot-com-bomb and the credit-crunch-chaos caused the last 10 years to be one of the worst in U.S. history. However, notice that weak 10-year periods always overshoot the mean, and are often followed by strong recoveries (i.e. your friend, “reversion to the mean”). Successful long-term investors develop perspective and “market memory” and learn to expect, but not predict market swings.

Enough statistics, where’s the wisdom? Successful long-term investors develop perspective and “market memory” and learn to expect, but not predict market swings. They design portfolios around goals rather than greed, rebalance as a risk-control, and don’t take more risk than is needed to achieve their goals. In fact, wise investors reduce their risk, strategically, when they are ahead of their goals after strong markets.

Important Disclosure: WealthStep created this chart for educational purposes from sources not audited by WealthStep but deemed reliable. 1825-1925 NYSE and 1926-2008 S&P 500 data are used with permission from Yale University (Goettzman) and Ibbotson, respectively. Returns reflect reinvestment of dividends but not potential transaction, custody investment management or tax costs. Past performance may not be indicative of future results and different types of investments involve varying degrees of risk.