Based on this information, we then calculated how long the market continued its gains before another bear market – essentially, the time period between the middle column and the last column. Also calculated was the price return (not including dividends) during this time period.
The Past is not a Fortune Teller
What can be discerned from this data is that in the simplest form, the reaching of an “all-time high” is not an indicator of future results. A third of the time (events #1, #5 and #8), the bull run only continued for about four months with an average return in the single digits. However, almost half of the time, the bull run continued for longer than 4 years…and in two cases, longer than 10 years! In these four longer runs, the average return was over 200%. On average, once the new bull market has surpassed its previous high, it typically continues for another 50 months with a return close to 100%.
Long Term Investors Should Not Fear
The Financial Times published an article recently entitled, “’Nifty Fifty’ Dents US Stock Bubble Fear.” In it, they discuss the fear in the current market based on exclamations that we must be in a bubble because the market is reaching new highs. They also cite the work of University of Pennsylvania Professor Jeremy Siegel related to the ‘Nifty Fifty’ stocks. In the early 1970s, these stocks had been bid up to extreme valuations. As an example, during 1972 Coca-Cola at one point was trading at a PE of 92, Disney was selling at 71 and Philip Morris was priced at 78. When Professor Siegel authored his paper in 1996, he showed that if investors had bought all of the stocks in the Nifty Fifty, even at their extreme valuations, they would have had annualized returns in the double digits.
This leads us back to the closing statement by the Financial Professional – “It’s about time in the market…not timing the market.” While we have all heard this saying, many investors have a hard time following these words. Instead of worrying about timing entry points, long term investors may be better off spending their energy and time on a factor that has been shown to have a greater impact, their asset allocation.
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