• Moreover, studies have shown that it is very difficult for most investors to time when to get in and out of the market: the average equity investors' annualized return between 1986 and 2005 was 3.9%, while the Standard & Poor's return was 11.9%, according to Lewis Harvey of Boston-based investment-research firm Dalbar. In many instances, by the time investors decide to sell, prices have already fallen; similarly, when investors feel comfortable to get back in, chances are they are comforted by gains in stock prices (the process also requires an investor to be right twice).
• Next, Figure 2 illustrates the findings of a Schwab study that looked at different holding periods for the S&P 500 from 1926-2007. Its research shows the longer an investor's time horizon, the less likely they are to incur a loss. For example, the greatest one-year calendar decline for the S&P 500 was 43.3%; however, over a 5­year period, the greatest downside witnessed was considerably less at -12.5%.

Figure2: Longer Holding Periods, Historically Have Led to Lower Risk (S&P 500 Returns)

Source: Schwab Center for Financial Research with data provided by Standard and Poor's. Every 1-, 3-, 5-, 10-, and 20-year rolling calendar period for the S&P 500 Index was analyzed from 1926 through 2007. The highest and lowest annual total returns for the specified rolling time periods were chosen to depict the volatility of the market. Returns include reinvestment of dividends. Indexes are unmanaged, do not incur fees or expenses, and cannot be invested in directly. Past performance is no indication of future results.

• Moreover, a separate FMRCo (MARE) study found when the trailing 10-year returns for the S&P 500 have been poor, as has been the case recently, it has generally been followed by better future performance.

Figure 3: Weak Trailing 10-Year S&P 500 Performance Periods Have Typically Led to Better Forward Returns

III. A Look at Investor Sentiment

• At times like this, we often pay closer attention to a number of sentiment indicators to help us better understand how investors are reacting to market dislocations. Sentiment indicators are normally used as contrarian tools and help to gauge market extremes: market tops often occur when most of the crowd is bullish, while market bottoms tend to form after excessive levels of pessimism. The thinking goes, if the majority of investor are bullish, then they have most likely already positioned themselves accordingly by buying stock (so who's the marginal buyer?); conversely, when investors are very negative, many of them would have already sold stock and have cash on the sidelines, so if they get incrementally more positive, this represents potential buying demand that could support stocks.
• The chart in Figure 4 overlays the S&P 500 with the 10-day CBOE Put/Call ratio. Much like insurance, investors buy puts to protect the downside of a position or to express a negative opinion. Often closer to market bottoms, there will be a spike higher in this indicator as investors get nervous and look to protect themselves, but high levels of buying of these instruments often occur at the later stages of a market decline. The current reading of 0.89 compares to the average reading of 0.59 since 1997. This is one of the highest readings over the past decade, with other extremes recorded after the September 11 attacks, around the February/March 2003 lows, and more recently in March of this year. Incrementally we see this as a positive sign, but the data set is somewhat limited.

Figure 4: Equity Put/Call Ratios Moving Toward an Extreme Level

Source: Bloomberg, SunTrust Robinson Humphrey

Figure 5: VIX Increases to 2008, but Still Well Below 90s/early 2000 Levels

Source: SunTrust Robinson Humphrey, Thomson One

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