The great recession, high unemployment, and the damage to your portfolio done in 2008 are probably still fresh in your mind, but did you know that even though the economy as a whole is slow to recover that the past two years the stock market has been churning out record returns? If you were one of the investors who got spooked by the stock market in 2008 and never ventured back in you may have been ignoring those news reports on purpose. After all, you’ve probably missed out on the 40-50% gains the broad market has realized since about two years ago.
Here’s the problem. Nobody can predict the future and history is no guarantee of the future, but we shouldn’t be at all surprised by this. It happened in the years following the 1987 crash and after the market bottomed out in 2003. Sharp declines are usually followed up by sharp advances. Of course at the time of a market bottom it’s usually a pretty bleak picture and it seems as if there’s nowhere to go but down, which was certainly the case this time around, but again it hasn’t happened (yet).
And others will be quick to point out that stocks still haven’t returned to their all-time highs in 2007 and the 2000s were basically a lost decade of investing anyway since markets went 10 years without seeing gains. All valid points if you focus on index prices and not real-world performance. As I’ve already discussed here before, even though the major stock indicies may not have gone up over the span of ten years, if you actually invested like a real person does and not like a hypothetical math problem, you turned a negative return in the market to a real positive return in your portfolio. Investing regularly over time, in a balanced portfolio, and rebalancing when necessary can make even a a historically bad investment period a lot better than the data shows.
Buying High and Selling Low
These market swings are bad news for average investors. That’s because most people who get spooked out of stocks do so only after they’ve seen sizable losses. They wait until they’ve lost 10, 20, or even 30 percent before finally calling it quits and moving to safety. Then what usually happens is we see what we’ve had the last few years where the market bounces back, but the losses are still fresh in everyone’s mind so people are unsure about getting back in. So, the market goes on to realize 10, 20, or 30 percent gains before most investors feel confident enough to get back in. Big problem! What you’ve done is taken a loss and sold, therefore locking in that loss, and then you’re on the sidelines while a bulk of the gains are made before deciding to get back in, so you buy back in at a high point. It’s a vicious cycle of buying high and selling low, which is the exact opposite of what you want to be doing. That’s why trying to time the market or investing on emotion never works.
So, where has your money been over the last few years? Were you fortunate enough to stick with your diversified portfolio and keep investing? Did you bail out a long time ago and still aren’t comfortable enough to get back in? Or were you a complete contrarian and dumped even more money into the market while it was still setting record lows?
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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.