Perspectives on the Market

I hope this finds you well.  Many of you have asked how low can the market go?  I don’t have a solid answer however I have done some research to give you a historical perspective.  It always helps to put things in perspective and this letter will be an attempt to do that for you.

In American it is important to remember that we have free markets and as such they go up and they go down.  It is quite clear that the afflictions in our economy are currently greater than the positives and thus the markets have headed south.

In reviewing the table it shows you the various average annual returns, the number of years that were down, and the largest percentage drop in any one year that the various allocations have done.

Most of you have a portfolio of 70% stocks and 30% bonds or a lesser percentage of stocks and greater percent of bonds in their portfolio.  If you will notice that in these allocation mixes you have six down years over a 30 year period and your worst single year was minus 10+%.  Given the potential return over the long haul to live through times such as these and not do anything rash is sound advice.  If you would like more details on this research I am happy to get it to you.  Hold on tight as I don’t think we are done yet.

Asset Allocation Returns 12/31/1978 – 01/31/2008

$100,000 Invested

Annual

Down

Worst

Worst

Stocks

Bonds

Return %

Years

Year

% Drop

End Value

100%

0%

12.90%

6

2002

21.65%

 $     3,412,190.00

90%

10%

12.72%

7

2002

17.81%

 $     3,251,040.00

80%

20%

12.50%

7

2002

13.96%

 $     3,073,430.00

70%

30%

12.25%

6

2002

10.12%

 $     2,883,287.00

60%

40%

11.98%

6

2002

6.28%

 $     2,684,419.00

50%

50%

11.67%

5

2001

4.12%

 $     2,480,439.00

40%

60%

11.34%

5

1994

4.43%

 $     2,274,711.00

30%

70%

10.98%

4

1994

5.24%

 $     2,070,295.00

20%

80%

10.59%

4

1994

6.04%

 $     1,869,914.00

0%

100%

10.18%

4

1994

6.84%

 $     1,675,930.00

(For this table I have used the Russell 1,000 Index for the Stock percentage and the Lehmann Brothers Long Term Treasury Index for the Bond positions.  It should allow you to look at your perspective portfolios in a simple manner and determine how far your portfolio should or could potentially be dropping. It should also be noted that the average annual returns shown reflect the indexes with virtually no expenses attached to them.  To put these annual return percentages into perspective I would recommend that they be reduced to by 2 to 2 1/2 percentage points per year.)

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