SINCE the low in the global equity market in March 2009, the MSCI world index has risen roughly 180% in total return terms, generating an annualised return of a remarkable 20%. Last year was one of the strongest years on record for equity markets.

The US managed a price return of nearly 30%. But as many market commentators have pointed out, this may be the most hated rally of all time; with seemingly many more people doubting its ability to survive than actually participating.

What’s more, this thing is getting pretty long in the tooth — 68 months in the case of the US and nearly six years since our own market dipped below 18,000 in November 2008. Despite recent scares, when both markets suffered double-digit losses in just a few weeks, the S&P 500 and the all share indices are still up 6.4% and 3.5% for the year.

But while it is perhaps becoming increasingly difficult to believe given their recent performance, it’s worth remembering that stock markets do have losing years.

That’s right, entire 12-month periods where stock prices end up lower than where they started.

With that in mind, here are a few things investors might want to consider before committing their life savings to the markets:

From Attain Capital Management

IF RECENT market moves scared you, you should diversify; not for what is going on today, but for what may come tomorrow (and may, in fact, already be here). The decision to diversify means being willing to accept smaller positive returns today in return for smaller negative returns tomorrow. At the end of the day, this isn’t just about the final return, it is about the journey as well. It’s about avoiding the swamps.

As the Abraham Lincoln quote in the movie Lincoln illustrates: "A compass … it’ll point you True North from where you’re standing, but it’s got no advice about the swamps and desert and chasm that you’ll encounter along the way. If in pursuit of your destination, you plunge ahead, heedless of obstacles, and achieve nothing more than to sink in a swamp … what’s the use of knowing True North?"

Just owning stocks and relying on the market going up indefinitely is akin to ploughing straight ahead with your compass pointing north. We’ve landed in stock market swamp; the question is, are you going to try to go through it, or diversify your way around it?

When a pro looks at how markets have done that day, or that year, or what have you, it’s completely dependent on whether they are holding that market long or short, and over what time frame.

From Business Insider

IT MAY sound obvious, but when you invest in stocks, you’re at risk of getting wiped out. That really is the single most important risk to investors. Even when you think you’re well diversified, you could see the value of your investments quickly plunge or perhaps slowly bleed 90% of its value over years, as the Greek stock market did during the eurozone crisis.

Citi’s Jonathan Stubbs recently released a research note on asset allocation in which he highlights some of the ugliest losses in various markets and industries in recent decades, including the UK (1972-74), the Nasdaq (2000-03), Greece (2008-12) and mining (2008-09).

But of course most losses are just paper losses that you don’t realise until you sell. If you have a long investment time horizon, you might think it wise to wait for the value to come back. However, an investor must be willing to be extraordinarily patient if he hopes to recoup his losses. "It can sometimes take many years for investors to make their money back after suffering big losses," Stubbs reminds us. "For example, US equities only made it back to the peak 1929 total return levels in 1945, more than 15 years after the Great Crash. Kenji Abe, Citi’s Japanese strategist, highlights that Japanese equities are still a long way short of end-1989 peak levels."

From Attain Capital Management

ANOTHER solution may be in looking at markets differently. There’s more than one "market" and there’s more than one side to the "markets". The majority of investors are long stocks, bonds and other instruments; and in that world if the price moves up, your investment in that item is making money, and if down, you’re losing money.

But for a professional trader the concept of winning when the market rises and losing when it falls is an odd one. That happens from time to time, but they also know the feeling of winning when the market fails and losing when it rises.

When a pro looks at how markets have done that day, or that year, or what have you, it’s completely dependent on whether they are holding that market long or short, and over what time frame.

It isn’t so much whether the market is up or down but how much it is up or down. It’s about the absolute value of the move, not the direction of the move.

Systematic guys are directionally agnostic. They’re not betting on prices rising or falling, nor rising or falling by a certain amount. More often than not, they are betting on being able to ride a rise or fall for a long enough time to offset (and some) any losses from getting into false moves up and down.

From FT Alphaville

THE danger is in listening to the wrong voices, a threat well illustrated in a story by Erik Hedegaard, an investor who, at the time, allocated tens of thousands of dollars in companies exposed to the rapidly growing legal marijuana industry in the US at the bidding of the "Wolf of Weed Street", described as "a charismatic ex-lacrosse player typically found in his comfy little home, on the couch with his laptop, watching business news on TV, trading a few stocks, dealing with the construction of his new website and fielding calls from freaked-out players in his little pot-stock universe."

"After weeks of buying at ‘bargain prices’, just like the Wolf, who repeatedly tweeted that you haven’t lost a cent until you’ve sold and realised the loss, everything was still crashing," explains Hedegaard, "and I began to wonder what kind of due diligence he and his crew had done on these stocks. They kept talking about ‘the fundamentals’, the factors Warren Buffett and other traditionalists judge a company by — cash flow, return on assets, the price-to-earnings ratio. "Help me out here," I said to the Wolf one morning. "What fundamentals are you looking at?"

He blinked several times but didn’t miss a beat. "Well, they have a business and a vision," he said, smiling, arms spread wide. "In a new marketplace like this, nobody knows what’s going to happen. So we use words like ‘fundamentals’ to stand for ‘it seems they’re not f***ing up’. But that’s pretty much the fundamentals right now."

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