Are Forest Fires Good?

The Yellowstone National Park fire of 1988 was one of the largest in U.S. history.   It burned over 1 million acres.  On “Black Saturday”, the worst day of the fire, it consumed over 150,000 acres.[1]

This fire was devastating in terms of acreage burned and animals lost, but it also was a re-birth for the park.   The fire allowed new life to rise from the ashes.  A forest fire is needed to clear out brush, dead trees and other items so new life can begin to grow.   Birds and bears returned to the burned area to nest and feed.[2]

My family and I visited Yellowstone in 2004 and were awed by the park’s beauty.   We spent some time exploring the area burned by the fire.   The once scorched earth was now covered with millions of trees.  The park ranger told us not one tree was planted by human hands.  All the trees were allowed to grow as a result of the fire.  He mentioned for the seeds to open they need heat similar to a popcorn kernel.  If not for the fire, these trees wouldn’t have been allowed to take root and grow.

A forest fire brings new life so, too, will a stock market correction.  Like a forest fire, a stock market correction, is not fun to experience but needed.  For a recovery to take hold there has to be some destruction.  When the stock market is falling it feels like the correction will never end.  During a down draft is when people abandoned their investment strategy not realizing better times are ahead.

According to the Reformed Broker the average stock market correction results in a drop of 13.3% and lasts 71 days while a recovery lasts 221 days and has an average annual return of 32%[3]

Let’s look at some recent history.   The Dow Jones rose 83% from the lows of the Tech Wreck in the early 2000’s and climbed 6,339 points.  Since the lows of the Great Recession in 2009 the Dow Jones Industrial average is up 148% and has climbed over 10,000 points.   An investor who sold their stock holdings during the last two corrections missed these epic rebounds.   It should be noted the stock market has never lost 148% of its value.

According to a study by Dimensional Fund Advisors of stock market performance from 1970 to 2015 found investors who missed the 25 best days saw a huge drop in their investment returns.  A buy and hold strategy during this 45-year stretch turned a $10,000 investment into $89,678.  If you missed the 25 best days during this run, your $10,000 grew to $21,224.  By timing the market, you “lost” a lot of money.  A $10,000 investment in U.S. T-Bills during this same period is now worth $9,195.[4]

What happened to Yellowstone a year after the fire?  The visitors returned in droves to Yellowstone National Park.  In 1989 the attendance for the park reached a record for the decade with over 2.6 million visitors![5]

Remember a recovery always follows a correction.  Don’t get burned by trying to time the market!

for our “God is a consuming fire.” ~ Hebrews 12:29.

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC.  www.parrottwealth.com

5/19/2016

 

 

[1] http://www.yellowstonepark.com/1988-fires-yellowstone/

[2] https://www.nps.gov/yell/learn/nature/upload/firesupplement.pdf

[3] http://thereformedbroker.com/2013/08/20/a-field-guide-to-stock-market-corrections/

[4] Dimensional Fund Advisors – Performance of the S&P 500 Index, 1970 – 2015.

[5] http://www.ksl.com/?sid=26482639

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