During the middle of the 1991 – 2001 business cycle expansion, a significant rise in stock market volatility started and has now affected two business cycles causing extreme stock market increases and decreases with the third one in progress.
How has this impacted the Individual Investor? Is there any recourse for the Individual Investor regarding any future, similar activity?
Using the Wilshire 5000 Total Market Index (^W5000 on Yahoo Finance) to evaluate total stock market activity (The W5000 is an Index and not an investment but will be used to calculate a rate for return), the 1991 – 2001 business cycle expansion topped on 3/24/2000 (120 Months Duration). The contraction bottomed on 10/9/2002 (8 Months Duration). The amount of drop was 50.2%.
The top achieved on 3/24/2000 was not recovered again until 2/20/2007, or 2,525 days (6.92 years) later. Assuming an investor did not sell for the entire time, their annual rate of return for those 6.92 years was 0.0%. In other words, 6.92 years was spent making up for the 50.2% loss incurred between 3/24/2000 and 10/9/2002.
Did it happen again?
The next business cycle expansion started at the previous bottom on 10/9/2002 and continued until it topped on 10/9/2007 (73 Months Duration). The contraction bottomed on 3/9/2009 (18 Months Duration). The amount of drop was 56.6%.
The top achieved on 10/9/2007 was not recovered again until 1/25/2013, or 1,936 days (5.30 Years) later. Assuming the investor again did not sell for the entire time, their annual rate of return for those 5.30 years was again 0.0%. Similarly, 5.30 years was spent making up for the 56.6% loss incurred between 10/9/2007 and 3/9/2009.
Starting with the 1991 – 2001 business cycle expansion top on 3/24/2000 (W5000 value equaled 14,751.60) and ending on 1/25/2013 during the current business cycle expansion (W5000 value equaled 15,878.72), the Buy & Hold investor was making up for stock market losses (2001 – 2003 and 2008 – 2009) for 12.25 years and over two business cycle expansions (2002 – 2007 and 2009 – Current) between 3/24/2000 and 1/25/2013, or 4,691 days (12.75 years). Their annual rate of return for for those 12.75 years was .58%.
In other words, for the period between 3/24/2000 and 1/25/2013, only .5 years out of 12.75 years was available to earn a return above the amount held on 3/24/2000!
The following blue link contains all the details associated with these actual scenarios and looks at the effects across these major indexes; W5000, S&P 500, DJIA, NASDAQ, RUT, RUI, and RUA. Also, a comparison is provided assuming Long-Term Trend Analysis, or LTTA, was utilized. There are no reasons why the Individual Investor should ever have to accept future significant stock market losses associated with business cycle contractions!
Business Cycles – Major Indexes PDF