Market downturns come with the territory

Downturns — or corrections — in the markets come with the territory when you invest in stocks. You have to stick around during the bad times to enjoy the good times.

Should stocks fall 5 percent or even 15 percent, you need to hang in there if you want the opportunity to experience the higher returns of about 25 percent that the market historically has shown on occasion.

Investors – who should always be invested for the long term – sometimes tend to forget this fact of stock-investing life. Historically the gains over time always have exceeded the losses. There is, of course, no guarantee this trend will continue in the future, but if the historical pattern holds stocks eventually will come out ahead.

In the recent downturn, from the peak on May 5 until June 20, the market fell 6.06 percent, as measured by the Russell 3000, in about six weeks. We have had months that we have lost a lot more than that.

Yet some investors apparently fear that the downturn might continue and be severe, such as that we experienced when the Russell 3000 fell 26 percent from March 27, 2000 to September 21, 2001. They don’t want to lose more money. Also, they might be listening to market commentators who talk of a repetition of the events of that time. These commentators talk of technology stocks running wild and the bull market being “long in the tooth,” whatever that may mean.

So they are selling their stocks.

But today’s market does not look anything like it looked in 1999 and early 2000 when the bull market was oversold and investor exuberance drove stocks up way beyond the companies’ earnings growth potential.

In the last three years actual earnings have almost been right on expectations. It is clear that the market expectations on earnings are not running away from reality as was typical in the euphoric markets of 1999.

Nor is there any reason to conclude that the bull market has lasted too long. The August 1982 to August 1987 bull market lasted 61 months and stocks rose 29 percent a year over that time, as measured by the Russell 3000 Index. The January 1991 to March 2000 bull market lasted 111 months, during which time the market rose 9 percent a year, according to the same measure.

The present bull market is average when judged against those two examples. From March 1, 2003 to April 30, 2006 the market, as measured by the Russell 3000, rose 19 percent a year for 37 months.

I don’t see anything to indicate that either the market or the prices being paid for assets are representative of conditions setting us up for real serious declines. Companies are making money; but, if anything, stocks are not gaining enough to reflect that.

There will be disappointments for sure, but this is not 1999 when some stocks were trading at 350 times earnings; now the figures are nearer 15 times forward earnings, which is close to the historical average.

Make sure you don’t join the pack crying fear and running for the exits. You might regret it. You should remain relaxed through the downturns.

Remember, this is the normal way in which markets act. They go up and they go down. Living through the downturns is modestly painful, but in the long run all that counts is to stay invested across a wide variety of assets.

The only time I am nervous about investing in stocks is when people think there is nothing wrong with investing in stocks and that they never will go down again.

If anything, dips in the market might be your opportunity to invest at lower levels. It is in environments like this that long-term investors make money.