By Steve Sanduski, CFP®

Rip Van Winkle slept for 20 years and awoke to discover that his world had changed dramatically. The U.S. stock market has been “asleep” for about 13 years now and, in another seven, we may find our world is much different, too.

In the nearly 13 years between January 11, 1999 and November 11, 2011, the S&P 500 index rose as high as 1,565 and dropped as low as 676. During that volatile period, we witnessed numerous impactful events including the following:

• The bursting of the dot-com bubble
• The rise of the euro
• 9/11
• The war on terrorism
• The rise and fall of the real estate bubble
• The spectacular rise of the price of gold
• The Southeast Asia tsunami and the Japan tsunami
• The rise of social media
• The Great Recession
• The sovereign debt crisis

Yet, with all those world events and the tremendous moves in the S&P 500—both up and down—during those nearly 13 years, guess how much the S&P 500 price changed between January 11, 1999 and November 11, 2011?

Exactly zero!

That’s right. The S&P 500 closed at 1,263 on January 11, 1999, and at 1,263 on November 11, 2011.
 
Does this mean you should never invest in the stock market because it’s been flat for so long? Of course not. As an advisor, you know that the market can go through long dry spells. However, your clients may get very impatient. Here are five things that you can share with them to help them stay the course and follow your plan:

1. Dividends matter. While there was no price change between these two time periods, reinvesting dividends, or owning investments that pay dividends, may have generated a positive return.

Action Item: Make sure your clients reinvest their dividends.

2. Diversification matters. The S&P 500 was flat, but some other asset classes did fine over the past 13 years, so it’s important to search far and wide for investment opportunities.

Action Item: Make sure your clients understand that you’ve expanded the set of asset classes that you invest in to include “alternative” investments.

3. Perspective matters. It’s easy to get caught up in the large day-to-day swings in the market, but understanding the broader trend or context of the market is important to help prevent day-to-day volatility from causing you to make bad investment decisions.

Action Item: Make sure your clients realize that you take a big picture and historical view of the markets and know how to place market frustration in context. 

4. Patience matters. As long-term investors, we’re more like the tortoise than the hare. Short-term, rapid traders create a lot of noise and may lead the pack from time-to-time, but we’re focused on winning at the end, not at each checkpoint.

Action Item: Make sure your clients know that you place high importance on winning at the end and not necessarily winning each inning.

5. Valuation matters. The bubble-like values placed on some companies in the late 1990s were so out of whack with normalcy, that it’s taken the market many years to work off those excesses. So, while patience is important, it’s also necessary to understand that valuation at the time you make your investment could have a major impact on how long it takes to get a return on your investment.

Action Item: Make sure your clients know that you have a process to evaluate “value” in the market and are willing to pass when things get out of whack.

Nobody knows if the market will remain “asleep” for another seven years to match Mr. Van Winkle. Regardless, you can tell your clients that, “The world will be different and we’ll keep searching for ways to help you reach your destination without nightmares.”

By Steve Sanduski, CFP®

Rip Van Winkle slept for 20 years and awoke to discover that his world had changed dramatically. The U.S. stock market has been “asleep” for about 13 years now and, in another seven, we may find our world is much different, too.

In the nearly 13 years between January 11, 1999 and November 11, 2011, the S&P 500 index rose as high as 1,565 and dropped as low as 676. During that volatile period, we witnessed numerous impactful events including the following:

• The bursting of the dot-com bubble
• The rise of the euro
• 9/11
• The war on terrorism
• The rise and fall of the real estate bubble
• The spectacular rise of the price of gold
• The Southeast Asia tsunami and the Japan tsunami
• The rise of social media
• The Great Recession
• The sovereign debt crisis

Yet, with all those world events and the tremendous moves in the S&P 500—both up and down—during those nearly 13 years, guess how much the S&P 500 price changed between January 11, 1999 and November 11, 2011?

Exactly zero!

That’s right. The S&P 500 closed at 1,263 on January 11, 1999, and at 1,263 on November 11, 2011.

So, what do you tell prospects who complain that their accounts have gone nowhere for more than a decade? Here are five things you can say to help them understand this long market malaise and help them realize that you can make a difference.

1. Dividends matter. While there was no price change between these two time periods, reinvesting dividends or owning investments that pay dividends would have generated a positive return.

2. Diversification matters. The S&P 500 was flat, but some other asset classes did fine over the past 13 years, so that’s why we search far and wide for investment opportunities.

3. Perspective matters. It’s easy to get caught up in the large day-to-day swings in the market, but we understand the broader trend or context of the market. This perspective helps prevent the day-to-day volatility from causing us to make bad investment decisions.

4. Patience matters. As long-term investors, we’re more like the tortoise than the hare. Short-term, rapid traders create a lot of noise and may lead the pack from time-to-time, but we’re focused on winning at the end, not at each checkpoint.

5. Valuation matters. The bubble-like values placed on some companies in the late 1990s were so out of whack with normalcy that it’s taken the market many years to work off those excesses. So, while patience is important, it’s also necessary to understand that valuation at the time you make an investment could have a major impact on how long it takes to get a return on your investment. We’re value investors.

You could end your prospect comments by saying:

“Nobody knows if the market will remain ‘asleep’ for another seven years to match Mr. Van Winkle. Regardless, the world will be different and we’ll keep searching for ways to help you reach your destination without nightmares.”

Print this post and use the data and comments in your conversations with prospects. This simple, plain language will resonate with them.