1) Peaks – There have been ten-year periods when investors have earned about 20% per year.
a. Since the Depression, there have been two such peak periods.
b. These peak periods were the ten years ending in 1958 and more recently in1999.
c. During these times, investors tend to believe the game has changed and that the returns are actually much higher and risks much lower.
d. Many decide that they should have more in equities and that equity investing is really a short-term, easy winning game.
e. Investors who either have very short time investing frames or normally do not invest in the equity market want to invest.
f. Adding to equity market positions or investing for the first time during peak periods means having more invested on the way down than on the way up.
g. The addition or the new investment suffers a permanent loss.
2) Troughs – There have been ten-year periods when investors have earned essentially no return.
a. Since the Depression, there have been three such trough periods.
b. These trough periods were the ten years ending in 1939, in1974 and more recently in 2008.
c. At these times, investors tend to believe that the game has changed and that the returns are actually much lower and risks much higher.
d. Many investors decide that the game has changed feel the need to pursue a different investing path, away from equities.
e. Investors consider, as substitutes, non-equity approaches to wealth creation such as: cash, fixed income, commodities, gold, oil, private non-equity investments, market timing.
f. Selling equity market positions during troughs means having less on the way back up than an investor had on the way down.
g. The amount sold suffers permanent losses, since it has no chance to recover.