The Long and Short of Things

10/09/2007 12:00 am EST

Focus: MARKETS

Daniel Wiener

Editor, The Independent Adviser for Vanguard Investors

Dan Wiener, editor of The Independent Adviser for Vanguard Investors, extols the value of long-term investing and says even the big recent short-term moves will be forgotten.

The Federal Reserve’s 50-basis point rate cut was the balm that soothed all wounds. Or maybe inves­tors simply discounted all of the bad news, pricing it into stocks early in [September], then let out a collective sigh of relief as reports of the economy’s death were found to be greatly exaggerated, or at least inflated.

Whatever the cause, stock markets here and abroad rallied in September, and many closed the quarter with substantial gains. The Dow Jones Industrial Index gained 4.0% in September and is up 11.5% for the year, while the Standard & Poor’s 500 index is up 7.6% for 2007. Large-cap stocks continued their rally, with the NASDAQ 100 gaining 5.1% for a year-to-date gain of 19.0%.

Overseas, emerging markets were more than just emerging; they were in full bloom. The Hong Kong market advanced 13.2% for the month and Brazil’s market gained 10.7%. Vanguard Emerging Markets Stock index fund (VEIEX) posted a 10.8% gain and is now up 34.9% for the year. Does any­one remember the fund’s 17.5% decline from late July through mid-August?

While the Fed’s rate cuts took short-term rates down, long rates rose a bit. You may have forgotten that at the beginning of this year, the yield on the ten-year Treasury was actually lower than that of the three-month T-bill by about 17 basis points. Well, that anomaly has been reversed, and the “spread” has been growing as investors have slowly begun to re-assess risk. At September’s end the three-month bill’s 3.70% yield was 88 basis points below the 10-year’s 4.58% yield.

October 19th will mark the 20th anni­versary of the 1987 stock market crash that baptized a whole generation of inves­tors. While I’m sure plenty of papers and magazines will focus upcoming “retro­spectives” on the turmoil and angst sur­rounding that day’s 22.6% Dow crash, I think it’s wiser to focus on the aftermath.

Yes, one year after the crash, the Dow was still down 4.9% (though, if you include dividends, that loss would have been cut by at least half). But looking further down the road, it’s pretty evident that investors who were scared out of the market that day probably missed out on the tremendous run we’ve had since.

Almost 20 years later, the Dow, excluding any dividends, is up about eightfold, or about 11% compounded. The point is that as inves­tors, we have to think long term. I know the cable channels have been filled with gloom-and-doom pronouncements from those who see disaster in every tick up for gold, or every tick down for GDP. But this is info-tainment, not invest­ing. At best it’s innocuous, but if you actually let it worry you, it’s downright dangerous to your financial health.

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