The History of the Dow — Why Risk Control Matters More Than Ever
Written by CUNA Mutual Group Annuities
When you look back at life in America over the past century or so, it’s amazing to see the progress made in society. Just a little more than 100 years ago there were only 45 stars on the flag, the average worker earned between $200 and $400 annually, and only two out of 10 adults could read and write.1
No matter how heavily your clients are involved in the market, they’re likely familiar with iconic periods in our nation’s history that center on how well the Dow Jones performed at the time. In 1929, most notably, financial panic ensued because of the stock market crash which led into the Great Depression. And in more recent history, the market’s downward spiral and global financial crisis of 2007-2008 still haunt some wary investors.
The recovery times of the most major market downturns have varied anywhere from six to 25 years.2 Though its upward climb has certainly not been a smooth one, the stock market has, over time, continued to rise and currently is experiencing record highs.
Still, many investors remain highly risk averse. Are their concerns warranted? While speculation over the market’s future is just that — speculation — there are lessons from our nation’s history that give insight into factors that typically impact market performance.
Political and Global Unrest
While the ushering in of the current administration didn’t cause the market turmoil that was anticipated, there is still a sense of unease about the Dow’s future. In general, markets remain more stable when governments can demonstrate stability and avoid conflicts. With North Korea’s taunting abroad and tensions rising at home, many Americans are proceeding cautiously and taking a wait-and-see approach to investing. And, while the administration’s pro-business agenda helped initially fuel some of the market’s growth in 2017, it has met with much political opposition.
Other global uncertainties are also creating anxieties, including Britain's exit from the EU, China’s weakened currency, trade deals, terror attacks and continued conflict in the Middle East. A look at history shows that events such as wars, presidential upheaval, low or stagnant wage growth and overvalued stocks preceded many downturns, and some investors deem the current conditions somewhat reminiscent of those times, undermining their confidence.
An Abundance of Data
Arguably, one of the greatest advances in the past 100 years has been that of the internet and access to information. With it has come the ability for the average investor to access vast amounts of data, leaving many overwhelmed. In years past, advisors may have informed clients about portfolio performance on a quarterly basis, whereas technology now allows those same clients to monitor activity in real-time. While access to data has brought with it many benefits, created transparency and empowered many investors, there are some who react irrationally to the market’s daily swings, causing fear and panic.
America’s debt is the largest in the world for a single country, and is greater than what American’s produce in a whole year.3 As the debt grows, debt holders could become concerned they won’t be repaid and may want larger interest payments in exchange for the increased risk. Despite setting a debt ceiling, Congress typically increases it to avoid another government shutdown. Over the long term, however, a growing federal debt could result in higher interest rates and a slower economy.
If there’s anything that history has shown us it’s that putting all your eggs in one basket is a risky venture. While no one can speculate on the Dow’s future, advisors can look at historical scenarios to evaluate which investment portfolios provided better downside protection (Opens in a new window). The S&P recently performed three hypothetical back-tested portfolios gauging the performance of variable annuities with risk control to that of traditional 60/40 stock and bond portfolios over a 20-year period ending in 2015. Their findings determined that risk control portfolios performed better than stock-only portfolios when examining returns, maximum drawdowns, annual volatility and other factors. So, it’s prudent for advisors to recommend an annuity option in a portfolio mix.
When political and global uncertainty looms, your clients can still feel confident that their investments will remain secure and that they can receive guaranteed income throughout retirement based on the proven performance of annuities over time.
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2 https://www.virtueofselfishinvesting.com/uploads/reports/2017/4675/history_of_market_corrections2-hires.png?link=mktw (Opens in a new window)
3 https://www.thebalance.com/the-u-s-debt-and-how-it-got-so-big-3305778 (Opens in a new window)