During a long downturn in the financial markets, it’s hard for some people to be cheerful about their prospects for investment success. And that’s not surprising, because a daily diet of bad news can take its toll on investors’ outlooks. Yet if you look beyond the headlines, you can actually find some reasons to believe that brighter days lie ahead.
Here are five of these potential causes for optimism:
1. Recovery may be near. The financial markets obviously are connected to the overall U.S. economy, so it makes sense to keep an eye on how the economy is doing. As you know, we’ve been in the grip of a long and painful recession — but that may change fairly soon. In fact, the recession is likely to end in the second half of 2009, according to a majority of the economists surveyed by the influential National Association for Business Economics. And since the stock market has historically anticipated an economic recovery by about six months — and begun responding favorably — now may not be the time to abandon your long-term investment strategy. Of course, past performance is not a guarantee of future results.
2. Market rallies can happen quickly. No one can predict the exact moment a sustained market rally will begin — but history has shown that rallies can start quickly and take off sharply. Consider this: In the first year of a recovery, investors have recouped an average of 82 percent of what they lost in the entire prior bear market, according to Standard & Poor’s. And since 1932, the S&P 500 has gained an average of 46 percent in the year after stocks have hit bottom. Keep in mind, though, that we have experienced a larger-than-usual drop in the market, so you shouldn’t necessarily expect a rally to produce these results. Still, if you are out of the market when it does rally, you are likely to miss some of the strongest returns.
3. Low prices may mean good opportunities. By almost any traditional measure of value, investments are now very attractively priced. And when prices are low, returns over the long term tend to be higher. Keep looking for quality investments — like other investments, they’ve been hurt by the downturn, but if their fundamentals are still sound, they could offer the greatest potential for long-term rewards.
4. The Treasury and Fed are working overtime to support the U.S. financial system. While the problems of resuscitating our financial system are enormous, and the solutions are not clear-cut, the Department of the Treasury and the Federal Reserve are working hard to support the credit markets, boost liquidity, lower mortgage rates and take other steps that can ultimately benefit the economy and the investment markets.
5. Low inflation can help boost “real” returns. Inflation, as measured by the Consumer Price Index, is currently close to zero. As an investor, you have reason to welcome a low inflation rate, because when inflation is high, it can erode the “real” returns of your investments. Consequently, you may be rewarded by investing in vehicles that, for the moment, are producing only modest returns.
Keep the above factors in mind when you make investment decisions. Remember, if you’re going to help achieve your long-term goals, you will likely need to keep investing in even the gloomiest of markets — and, as we’ve discussed, there might be more than a few rays of light ready to pierce the clouds.