The 1970s has many similarities to what we’re going through now, and here are some lessons you can take from the past, writes Nick Atkeson of Delta Investment Management.
The late sixties and most of the 1970s was a time of turmoil, culturally, politically, and financially.
The United States struggled with the Cold War, cultural awakening, political scandal, the rise of OPEC, stagflation, and a myriad of other issues. This had many believing our best days were behind us, and that Japan was the next major superpower.
The headline news regarding Vietnam, protests, Watergate, oil price shocks, price controls, high tax rates, government regulation, and runaway inflation was reflected by a stock market that had high volatility with a bearish trend. Owning the Dow from 1965 through 1981 was a losing experience.
In many ways, the past decade has been a lot like the 1970s. The headline news is filled with war, protests, government regulation, high energy prices, etc. Many believe America’s best days are behind it and China will soon become the world’s next great superpower.
What is interesting is that not only is the headline news similar, the secular bear-market pattern of the stock market is also very similar.
Buy-and-hold investors have not made money for the past 11 years. Interest in owning stocks continues to fade. Over the past four months, investors have withdrawn $87 billion from US stock mutual funds, the worst rate of exodus since 2008.
Watching your net worth dramatically rise and fall is more than most people can live with emotionally. The strain of having retirement seem to fade into a feeling that you will have to work for the rest of your life causes many investors to make suboptimal investment decisions during these choppy times.
According to JP Morgan, the average investor has achieved an average annualized return of 2.6% over the past 20 years (1991 to 2010), versus a 7.7% return for the S&P 500 and an inflation rate of 2.4%. Clearly, most of us have a lot to learn about how to manage our money in times like the 1970s.
In thinking about how successful investors made money in the 1970s and how money is being made today in stocks, the first step is back: look at a longer-term history of the market. By placing the 1970s and today’s market in a broader context, we can gain insight into the duration of these secular bear markets and how best to invest.
Shown below is a chart of 110 years of the S&P 500. It shows the market stair-steps higher over time, with long periods of volatile, non-trending activity followed by a stretch of buy-and-hold steady appreciation.
NEXT: Lesson 1