The Long and the Short of Sequence

Yes. The sequence of investment returnrns can impact lifestyles of long-term investors and retirees. But sequence is equally important during shorter timeframes.

If you need proof, just look at the stock market this year.

With the slew of negative headwinds the U.S. and global economies faced at the beginning of this year, it was understandable if investors didn’t jump in head first on January 1.

Yet, those who ponied up on the first trading day of 2012 got immediately positive feedback. The S&P500 was up 12.3% from January 1 to April 1. Now, assuming these investors were the buy-and-hold type, this start to 2012 would have given them confidence that 2012 was going to be good to stocks. But their hopes were quickly dashed…

From April 1 to June 1 the S&P500 lost 11%, erasing nearly all of the year-to-date gains that the early birds had been enjoying. The result?

Investors could have bought the S&P500 at the exact same price on June 4 as they did on January 1. See here on a chart of the S&P 500:

 S&P 500 Chart

See image larger

Of course everyone who bought in January felt like a rock star through April, then bit off all their fingernrnails from April to June. If they caved under the pressure at that point and sold out, they would have lost out on the year’s second, lasting rally.

The market headed higher in June and kept on going. It’s now up 16% year-to-date.

The sequence of this year’s rallies and pullbacks has made it difficult for many investors who don’t know whether to trust the economy – which is still faltering – or the stock market – which is showing remarkable (cough, Fed-stimulated) resilience and strength.

And that’s why we continue to take a long-term view and a balanced approach to investing, with a focus on Shakeout Survivors and income-producing investments.