Sometimes, it pays to hold on
By Zhen Ming
WICKED. That's the only way to describe last week's stock market rout.
We're only halfway through, but expect this October to go down in the annals of world financial history as the global financial system's most volatile month ever.
Earlier this week I had watched, from the safety of the sidelines, wide-mouthed and flabbergasted, as Wall Street stormed back after its worst week ever to stage the biggest single-day stock rally since the Great Depression in the 1930s.
The benchmark Dow Jones industrial average regained 11.6 per cent in one day - after tumbling some 22 per cent over the previous eight trading days.
That was on Monday.
Global stock markets staged a historic 'relief rally' on that day, as European governments pledged a total of 1.87 trillion euros (about $3.7 trillion) to save their ailing banks, and as the US confirmed it would follow suit with a similar rescue.
Watching US investors rummage through the financial wreckage on Wall Street for so-called bargains, you might think the worst is over.
But is it?
To answer this question, we need to take a closer look at last week's historic fall on Wall Street, which left the Dow at 8,451 on that frenzied Friday - 40.3 per cent off its 9 Oct 2007 all-time high of 14,164.
Friday was a roller-coaster day that saw the Dow dip briefly below the 8,000-point mark before creeping back up as investors snapped up last-minute bargains.
Indeed, last week's precipitous drop eclipsed the dark days of the Great Depression.
All in all, the Dow lost 18.2 per cent over five days, worse than the dismal week that ended 22 Jul 1933, when it plunged 17 per cent - and that was when the exchange on Wall Street was open six days a week.
But consider the worst period in history from a long-term investor's perspective.
If you were 55 just before the stock market crashed in 1929, and had been rich enough to invest US$100,000 in the market, you would have been in a very sorry shape by the time you retired 10 years later.
After an 83 per cent decline in the stock market by 1932, you would have recovered some of your money by retirement in 1939 - but not all of it.
On your retirement, you would have had only US$60,200 for your nest egg, according to market data tracked by Ibbotson Associates, a Chicago research firm.
That's because, on average, it took an investor just before the 1929 crash almost 13 long years to recover all that was lost.
But what about younger investors?
If you were only 25 just before the 1929 crash, the humongous loss in the Great Depression would have been a distant memory by the time you retired in 1969.
By then, you would have seen your US$100,000 investment grow 21-fold to US$2.1 million.
A harsher bear market
But, young or old, don't count on history repeating itself to prove you right.
This bear market - a term often defined as a prolonged drop in stock prices of 20 per cent or more - already is harsher than most of the 10 bear markets since the 1930s. (Those earlier bear markets have lasted an average of only 16 months from peak to trough.)
Expect a turnaround no earlier than 2010.
The Hong Kong Monetary Authority, for instance, has said that it would provide government backing for all of the US$773 billion in Hong Kong bank deposits through 2010 as government assistance for banks in Europe and the US put pressure on Asian regulators to follow suit (though Asian banks tended to be better capitalised).
The good news? Since the record 83 per cent plunge in 1929-32, the current market plunge is exceeded only by the drops of 49 per cent in 2000-02 during the dotcom implosion and 48 per cent in 1973-74 during a recession and energy crisis.
Unfortunately, many investors have now convinced themselves that this time it's different - that the credit crisis could push economies worldwide into the deepest recession since the Great Depression.
But in their panic, investors are ignoring 70 years of history.
Since the Great Depression, governments throughout the world have become far more aggressive about intervening when credit markets seize up or economies struggle.
And, trust me, those interventions have generally succeeded.
Source: The New Paper, Thu 16 Oct 2008
By Zhen Ming
WICKED. That's the only way to describe last week's stock market rout.
We're only halfway through, but expect this October to go down in the annals of world financial history as the global financial system's most volatile month ever.
Earlier this week I had watched, from the safety of the sidelines, wide-mouthed and flabbergasted, as Wall Street stormed back after its worst week ever to stage the biggest single-day stock rally since the Great Depression in the 1930s.
The benchmark Dow Jones industrial average regained 11.6 per cent in one day - after tumbling some 22 per cent over the previous eight trading days.
That was on Monday.
Global stock markets staged a historic 'relief rally' on that day, as European governments pledged a total of 1.87 trillion euros (about $3.7 trillion) to save their ailing banks, and as the US confirmed it would follow suit with a similar rescue.
Watching US investors rummage through the financial wreckage on Wall Street for so-called bargains, you might think the worst is over.
But is it?
To answer this question, we need to take a closer look at last week's historic fall on Wall Street, which left the Dow at 8,451 on that frenzied Friday - 40.3 per cent off its 9 Oct 2007 all-time high of 14,164.
Friday was a roller-coaster day that saw the Dow dip briefly below the 8,000-point mark before creeping back up as investors snapped up last-minute bargains.
Indeed, last week's precipitous drop eclipsed the dark days of the Great Depression.
All in all, the Dow lost 18.2 per cent over five days, worse than the dismal week that ended 22 Jul 1933, when it plunged 17 per cent - and that was when the exchange on Wall Street was open six days a week.
But consider the worst period in history from a long-term investor's perspective.
If you were 55 just before the stock market crashed in 1929, and had been rich enough to invest US$100,000 in the market, you would have been in a very sorry shape by the time you retired 10 years later.
After an 83 per cent decline in the stock market by 1932, you would have recovered some of your money by retirement in 1939 - but not all of it.
On your retirement, you would have had only US$60,200 for your nest egg, according to market data tracked by Ibbotson Associates, a Chicago research firm.
That's because, on average, it took an investor just before the 1929 crash almost 13 long years to recover all that was lost.
But what about younger investors?
If you were only 25 just before the 1929 crash, the humongous loss in the Great Depression would have been a distant memory by the time you retired in 1969.
By then, you would have seen your US$100,000 investment grow 21-fold to US$2.1 million.
A harsher bear market
But, young or old, don't count on history repeating itself to prove you right.
This bear market - a term often defined as a prolonged drop in stock prices of 20 per cent or more - already is harsher than most of the 10 bear markets since the 1930s. (Those earlier bear markets have lasted an average of only 16 months from peak to trough.)
Expect a turnaround no earlier than 2010.
The Hong Kong Monetary Authority, for instance, has said that it would provide government backing for all of the US$773 billion in Hong Kong bank deposits through 2010 as government assistance for banks in Europe and the US put pressure on Asian regulators to follow suit (though Asian banks tended to be better capitalised).
The good news? Since the record 83 per cent plunge in 1929-32, the current market plunge is exceeded only by the drops of 49 per cent in 2000-02 during the dotcom implosion and 48 per cent in 1973-74 during a recession and energy crisis.
Unfortunately, many investors have now convinced themselves that this time it's different - that the credit crisis could push economies worldwide into the deepest recession since the Great Depression.
But in their panic, investors are ignoring 70 years of history.
Since the Great Depression, governments throughout the world have become far more aggressive about intervening when credit markets seize up or economies struggle.
And, trust me, those interventions have generally succeeded.
Source: The New Paper, Thu 16 Oct 2008
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