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Time to buy? 28 Feb 2007 If history is any guide, the recent global equity market bleeding presents long-term investors with a buying opportunity. Wall Street lives by the adage that investors should buy when there is blood in the streets. While market players may be a superstitious bunch, in this case it's a maxim that has been borne out over time. Rather than run from Tuesday's blood-letting, which saw the Dow sink more than 400 points, long-term investors may do well to chase what history suggests is a time to buy The Dow Jones industrial average was already bouncing back on Wednesday, making it easier to put the previous day's sell-off in perspective. In terms of points, Tuesday's 416-point decline was the steepest the market has fallen since a nearly 685-point drop on Sept. 17, 2001 - the first day of trading after the 9/11 attacks. In terms of percent, the Dow's 3.29 percent fall was the largest since Sept. 27, 2002's 3.70 percent retreat. Tuesday's point decline is the seventh largest over the last 50 years. ( <http://dai.investor.reuters.com/data/files/DJIA.xls> Click here for an Excel sheet of the historical closing values of the Dow.) Date Point Decline Period 1: Sept. 17 2001 -684.81 Period 2: Apr. 14 2000 -617.78 Period 3: Oct. 27 1997 -554.26 Period 4: Aug. 31 1998 -512.61 Period 5: Oct. 19 1987 -507.99 Period 6: Mar. 12 2001 -436.37 Period 7: Feb. 27 2007 -416.02 Remember, though, that the Dow has been near an all-time high, so the percent decline is not nearly as bad given the magnitude of the point fall. In fact, over the last 50 years, there were 33 worse trading days in terms of percentage declines. The question we need to answer is what we can expect for the markets going forward? While past performance is no guarantee of future returns, we can still look at history as our guide. We focused on the six larger point declines over the last 50 years and examined the performance of the Dow during the one-month and one-year periods that followed the drop. In the event that the market was closed exactly one month or one year ahead, we looked at the next trading day. We found that, on average, the Dow posted solid returns. First, notice that the Dow has generally been higher one month after one of these sell-offs, with an average gain of more than 4 percent. 1 Month Performance Starting Value Ending Value Percent Change Period 1: Sept. 17 2001 - Oct. 17 2001 8920.70 9232.97 3.50% Period 2: Apr. 14 2000 - May 15 2000 10305.77 10807.78 4.87% Period 3: Oct. 27 1997 - Nov. 28 1997 7161.15 7823.13 9.24% Period 4: Aug. 31 1998 - Oct. 1 1998 7539.07 7632.53 1.24% Period 5: Oct. 19 1987 - Nov. 19 1987 1738.74 1895.39 9.01% Period 6: Mar. 12 2001 - Apr. 12 2001 10208.25 10126.94 -0.80% Average NA NA 4.51% Keep in mind that investing is a long-term process and investors who have stuck it out longer have usually fared well: The Dow has returned, on average, about 12 percent in the year following these six other sell-offs. 1 Year Performance Starting Value Ending Value Percent Change Period 1: Sept. 17 2001 - Sept. 17 2002 8920.70 8207.55 -7.99% Period 2: Apr. 14 2000 - Apr. 16 2001 10305.77 10158.56 -1.43% Period 3: Oct. 27 1997 - Oct. 27 1998 7161.15 8366.04 10.97% Period 4: Aug. 31 1998 - Aug. 31 1999 7539.07 10829.28 43.64% Period 5: Oct. 19 1987 - Oct. 19 1988 1738.74 2137.27 22.92% Period 6: Mar. 12 2001 - Mar. 12 2002 10208.25 10632.35 4.15% Average NA NA 12.04% Again, there is nothing to say that the Dow will be higher one month or even one year from now. There are many factors that suggest easing economic growth, such as Wednesday's <http://www.reuters.com/article/ousiv/idUSN2742022620070228> downward revision in GDP figures, which could adversely impact stock prices. But history suggests that investors may want to take advantage of the lower stock prices to add positions they've had their eye on. Blood-letting may be scary, but it can be good. At the time of publication, Erik Dellith did not directly own shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund. Ratman Now Everyone Can Trade Believe The Unbelievable,Dream The Impossible, Don't Take No for An Answer http://www.j-club.biz
