An overvalued market – not always a bad thing
Today's Financial News - Posted November 9, 2009
Alex Green, Chief Investment Strategist at Investment U looks at the value of long-term investment planning – and how long-haul planners can benefit from a bear market.
Alex Green (Investment U):
Jeremy Grantham, president of investment management firm GMO LLC, has been getting a lot of press lately.
At the market’s top, he warned of an impending bear market. At the bottom in March, he forecast a historic rally. Today, he says the market is 25% overvalued.
Should you be worried? Perhaps not.
Let’s start with Grantham’s track record. He’s made a couple of good calls lately. But does he get it right all the time? Of course not. No one does.
But even if he’s right, it wouldn’t necessarily be negative. It all depends on your time horizon. Here’s why…
How Long-Term Investors Can Benefit From A Bear Market
If you own stocks on margin, call options, or LEAP options, a market downturn could be devastating. A 50% decline in the value of a fully margined account would erase your equity. Your options could expire worthless.
Who benefits from a bear market? The obvious answer is short sellers and put option buyers.
But others benefit, too. Primarily long-term investors.
A new study by T. Rowe Price shows that those who began systematically investing in equities in severe bear markets made out “significantly better” than investors who began in bull markets.
Take 1929, for example, the year that kicked off the Great Depression…
From 1929 to 1938 – one of the worst 10-year periods in history – the S&P 500 returned minus 0.9% annually.
Yet if you began investing $500 a month in 1929 and kept it up for 30 years, your total return was 960%.
If you did the same thing starting in 1970 – the start of one of the other worst decades in market history – you’d have fared even better: up 1,753%.
These investors did more than twice as well as those who invested the same way at the beginning of the go-go 1980s and 1990s.
What can we take from this?
Continue reading this article at Investment U.
Next Article: The Buffet Strategy – building value for investors and markets
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