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Are the Markets Predictably Unpredictable?

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07/01/2010 - You've heard these words before – the direction of the stock market – particularly over short time periods – is very difficult to predict. Look no further than the recovery in stocks that began, unannounced, in early March 2009.

That period of time represents yet another case where, just when you are convinced the market will continue moving in one direction, sentiment shifts without notice and stocks are suddenly heading in a completely different direction. While this has happened throughout the history of the markets, too many investors have a difficult time remembering the market's history of unpredictability, and often change course at precisely the wrong time. Many make the mistake of selling near the market's low point, then miss out on a recovery.

Those who sold out in early 2009 paid a steep price. From its low on March 9, 2009 to the end of April 2010, the Dow Jones Industrial Average (DJIA) gained 67 percent, a dramatic rally for such a short period of time – but not unprecedented. Compare it to other major bear markets and follow-up recoveries in U.S. history:

Bear market begins DJIA low* DJIA 13 months later** %age gain

1929 (89% market drop) 41.22 102.41 148.4%

1973 (48% market drop) 577.60 975.28 68.9%

2000 (49% market drop) 7286.27 10428.02 43.1%

* Lowest point reached in bear market before a sustained recovery

** Price at end of 13th month after market low was reached (for instance, April 30, 2010 following March, 9, 2009 market bottom.)

Source: Historical record of public data posted by Dow Jones & Co.

In each of the cases, the starting point of the rally was unpredictable. Yet the results were extremely beneficial for those who kept their money working in the market.

Have a plan and stick with it

Just as dramatic market recoveries often begin without notice, the same can be true of market downturns. In today's environment, where the media can provide you with nearly a minute-by-minute assessment of where the markets stand, it is easy to think about short-term trends and get caught up in the idea of trading in-and-out of the market. This is a very challenging investment approach that few have managed to master. It is also a high stress style of investing that is subject to a wide range of unforeseen variables that can impact markets on a day-to-day basis.

For most of us, it may be more sensible to maintain a "tried-and-true" approach to investing. This involves:

• Putting money to work regularly – most of us do this with each paycheck by directing part of our income into our workplace retirement plans. Regular contributions to IRAs and other investments also make sense.

• Owning a diversified mix of investments – you should choose an asset allocation strategy that is appropriate for your risk tolerance level, investment objectives and the time you have available to let your investments grow.

• Holding for the long run – to help avoid the potential for losses from short-term market swings, you may be better positioned for success by maintaining a long-term stance with your portfolio.

Most of us are trying to achieve long-range goals. Trying to manage money in a short-term fashion in response to changes in the market may be detrimental in your quest to build wealth over time. You may be better served by maintaining a disciplined, long-term, diversified approach. Discuss strategies for your situation with your financial professional.


Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC. Some products and services may not be available in all jurisdictions or to all clients.

Diversification helps you spread risk throughout your portfolio, so investments that do poorly may be balanced by others that do relatively better. Diversification and asset allocation do not assure a profit and do not protect against loss in declining markets.

The Dow Jones Industrial Average is an unmanaged index that follows the returns of 30 well-established American companies, and is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in the market prices, but excludes brokerage commissions and other fees. It is not possible to invest directly in an index.

© 2010 Ameriprise Financial, Inc. All rights reserved.

File # 100802


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