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R. Scott Maxwell, MBA

My lovely bride is angry.

Her retirement account is down and she does not like it - not one single bit. Her November statement offered nothing but bad news, just as it has done all year.

With fire in her eyes, she looked at me and asked a piercing question, “What happens when it goes to zero?”

“Dolly,” I cautiously began, “your account is an elegantly designed portfolio with over 15,000 stocks from 41 different countries around the globe. It is down because markets around the world are down. I know it is no fun to open your statement and see your account down, but it will not go to zero. You just have to be patient, look to the long-term and ride this out.”

“How do you know it won’t go to zero?” She icily replied.

“Because all 15,000 companies contained in your portfolio would have to go bankrupt for you to lose everything” I logically responded.

“So there is a chance!”

Can you empathize? Do you feel like there is no bottom in sight? Do even the best explanations from your most trusted advisors ring hollow to you?

My lovely bride knows I am devoted to her. She fully understands her investment plan and she trusts me to give her my absolute best, unbiased advice. But that does not stop her from worrying about worst case scenarios or wondering if the markets will ever recover.

It turns out, she is not alone.

Dena Katz, associate professor of personal finance at Texas Tech and chair of Evensky & Katz Wealth Management, shares in a recent article how her husband and business partner Harold Evensky offers two possibilities:

Possibility #1 - the world is coming to an end.

Possibility #2 - the next few months or years may remain scary, but they are “The result of clearing out a backlog of financial nonsense and some chicanery” which should lead to “The beginning of a much healthier future.”

Yes, the world might be coming to an end. My lovely bride might be right in her assessment there is a chance the world’s economy may tumble to ruin.

Yet if this is the case, then, to quote Mr. Evensky, “There are no safe harbors and therefore no place to go.”

I am sure you have heard comparisons between today’s market and the Great Depression. While I could extol on the few similarities and many dissimilarities between then and now, there is one undeniable truth. The world did not end between 1929 and 1932.

There is no reason to believe today is any different.

There is also every reason to still believe in the market and to remain positioned to earn a reward for bearing the risk we are currently living through.

The National Bureau of Economic Research (NBER) reports the U.S. economy experienced ten complete business cycles since World War II. The average length of a recessionary contraction was 10.5 months. The average length of an expansion was 57 months.

While the relatively short duration of a recessionary contraction is comforting on its own, the really good news is how the market performed during those cycles.

The stock market (as represented by the S&P 500 index) has an annualized average return of 10.77% per year (as of November 2008) since its first peak following World War II in November 1948. The average annual return for each complete business cycle is 12.67%, ranging from an annualized low of 3.88% per year (December 1969 to November 1973) to a high of 21.56% per year (July 1953 to August 1957).

Even more comforting, and the reason why the market has ultimately rewarded investors during each business cycle (especially since we are smack dab in the middle of a tough market), JennisonDryden reports the average annual return of the S&P 500 index in the twelve months following the previous nine U.S. bear markets is +36%.

It is also remarkable to note that despite the economic turmoil of the Great Depression, consistent investment was ultimately rewarded. Wharton Professor of Finance Jeremy Siegel reports in his book Stocks for the Long Run that any investor who consistently invested in the U.S. stock market each and every month between October 1929 and October 1959 would have realized an annualized return of 13% per year. Not bad, considering the Dow lost a horrendous -89% from its highest point in September 1929 to its eventual lowest point in July 1932.

Should we automatically assume the same strong returns await us once our current market turns the corner? No one really knows, or can know, until we get there.

History tells us our best option is to remain committed to a long-term investment plan that matches our objectives with our time horizon and our risk comfort level. My family and my clients remain committed to thriving in the years ahead.

History also tells me I owe my lovely bride, who has stood by me for the past nineteen years, a nice night out on the town.