World on edge: Run?…Or draw a picture?

People and businesses can’t get loans. It seems that every few days another bank fails. Thousands on Wall Street are losing their jobs. The Economist graces its cover with an image of the world on the edge of the abyss.

The Economist cover image, October 4th-10th 2008 print

The fear sets in. What is one to do?

Here at GropeStone we drew a picture. One long picture. And stuck it in a prominent place as a reminder.

The chart in the header of the pages on this site goes back to 1975. The gray and red columns show the annual returns of the S&P 500 index including dividends, the blue line the fate of one 1975 dollar invested in that index with all dividends reinvested when received.

Each dollar invested back then would have grown to about $49 at the end of September 2008, even after the recent market plunge.

There is some cheating in this number. It ignores taxes. And a dollar back then is worth about four of today’s dollars. Plus it’s been a rough ride, with long periods of paltry or negative returns.

Even armed with long-term perspective, we find the drops gut-wrenching. Our brains scream at us to escape the danger, especially when others are running. Our ancestors out on the savannah no doubt had to be quick; the long-term dreamers didn’t survive. So we’ve evolved to feel the short-term losses more than we feel the long-term gains, the stuff of behavioral finance.

But still, drawing a picture can help.