The Financial Lifeboat Drill

Many individuals have taken some sort of trip on a cruise ship in their lifetime. However, for those of you who have not (or a refresher for those that have), do you know what is the first thing that happens just before you get ready to leave port?



Many individuals have taken some sort of trip on a cruise ship in their lifetime. However, for those of you who have not (or a refresher for those that have), do you know what is the first thing that happens just before you get ready to leave port? 

Envision this: you get on the ship and are looking around, with the excitement of an upcoming relaxing vacation. After finally getting all your things stored into your cabin, maybe you’ve been able to sneak a pre-launch beverage of choice or even a casual stroll to the gaming area. Just as you are settling into a comfortable chair on the deck, you hear the captain say…”would all passengers go get your life jacket and proceed to the upper levels for a Life Boat Drill.”  You’re probably thinking, “Wait a second; we have just left port and we’re sinking already?  What ship did I get on, the Titanic” (as you check the name on the side of the ship once again)?

No, but every cruise line that leaves port must review the safety procedures (Life Boat Drill) just in case the boat does begin to sink. Will it sink? Most likely not, but as a passenger you need to be prepared for the rare occurrence, less you become part of Davey Jones’ Locker. The drill is intended to hopefully stop those passengers from jumping overboard if the vessel encounters some rough seas. Wouldn’t it be nice if we could have the same Life Boat Drill for the financial markets? Let’s call it the Financial Life Boat Drill.

For example, the chart* of the S&P 500 Index below will show you a history of “rough financial seas.”

We believe what can be learned from this chart is simple:

1. Since the end of World War II, we have had 13 of these potentially capsizing financial waves hit us as investors (our industry refers to them as Bear Markets). 

2. This averages out to be about one every five years with the average drop of around 30 percent, with the duration being about 14 months.

3.  So far, each new market peak is above the prior market trough – that means we did not sink.

4. Every crisis above we have had thrown at us, we have been able to survive and thrive.

5. Since the Market Peak of our first event in 1946, the market had gone up over 81 times (not including dividends and not adjusted for inflation) since the last Market Peak in 2007.

6. While the ebb and flow of the market moves in cycles, the declines (represented by market troughs) have not eclipsed the advances (represented by market peaks).

So, if you work and accumulate wealth over a 40-year period, you are now aware of the possibility of going through an average of eight of these events.  And in a retirement of up to another 30 years, you will potentially see another six. We have now concluded the educational portion of the financial markets. Hopefully, this will allow you to enjoy your life long investing cruise and give you some perspective if you are thinking about jumping out of your investment portfolio when the next wave hits.

Disclosures:

Past performance is no guarantee of future results.

This article was written by Lou Melone, Managing Partner, with Budd, Melone & Company in Auburn Hills, MI.  Lou Melone can be reached at 248.499.8704. 

Posted date on Dbusiness.com- Article XVI, Issue II

Dated 6.2012

*Source: Yahoo Finance Historical Returns.  Results do not include dividends.  Past Performance is no guarantee of future results.  Index listed is the S&P® 500

The S&P 500 Index:  The S&P 500 index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the index proportionate to its market value.

Wells Fargo Advisors Financial Network did not assist in the preparation of this article, and its accuracy and completeness are not guaranteed.  The opinions expressed in this article are those of the author and are not necessarily those of Wells Fargo

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