Searching for a Bottom - the Disappointed Investor

I recently analyzed both the S&P 500 and the Dow Jones Industrial Average (DJIA), two broad market indices that most investors look to as their pulse of market health. I wanted to test the buy-and-hold theory on these broad indices which many of us invest in through indexed mutual funds, such as the Vanguard 500 (VFINX).

Taking an investor, say Investor A, who purchased $100,000 every month in each index, I tracked how that Investor A's annual return would look had he invested every month for the past 10 years. I then looked at how another investor, say Investor B, performed had he begun to invest just one month prior to Investor A and looked at his returns over a 10-year period. I then went back every month and retested this investment strategy, back to January 1960 for the S&P 500 (this investor was invested for the 10-year period starting January 1950) and back to January 1939 for the DJIA Investor (this investor was invested for the 10-year period starting January 1929).

The results of this analysis provides a perspective on an investor's "happiness" or "disappointment" with the performance of their buy-and-hold strategy when evaluated over a 10-year period going back over the past 70 years. The results are startling.

First, the S&P (note that red line indicates average 10-year return):

Next, the DJIA:
Notice anything interesting?? Just as people were ready to throw the theory of buy-and-hold out the window, as they likely wanted to do in 1942 as their annual returns looking back 10 years were almost -2% (DISAPPOINTMENT) or in mid-1974, as their annual returns looking back 10 years was almost at -4% (DISAPPOINTMENT), the trailing returns began to sharply recover. In 1942, it was the war effort that re-ignited the economy and in mid-1974, Nixon had just resigned and the DOW (and S&P) staged a horrific collapse over 2 months of over 25%. Newsweek, in one famous call, quipped "Is there no bottom?"

Well, we are at about that same place now on the charts above. In terms of market bearishness and annual returns for investors looking back 10 years...this is worse than it's ever been. An investor who began investing monthly in the S&P 500 10 years ago, is down 5% annually...an incredibly depressing figure and one that has the buy-and-hold bashers dancing in their bomb shelters. Shockingly, the S&P is down 27% over the last two months (echo, echo, echo...)

So what happens next...this is anyone's guess...it could get a lot worse (as everyone will quickly tell you)....or this is just the time when you should NOT be looking to get out, but actually looking to get invested and Quick! One minor note for those DEBATING whether to get in now...or wait...investors who jumped in at this same low point in 1974, saw returns over the next 10 months (as the market rebounded sharply) of 31% annualized...those who jumped in 1 month early, saw returns of 28% annualized.