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?
Author: Jeremy Vohwinkle
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I had about 85 percent of my investments in stocks in the 09 crash, mostly in mutual funds. I am now about 90 percent in stocks and have been dollar cost averaging for about 5 years now. I rebalanced in Jan 2011 and exchanged some stocks and mutual funds to short term bonds and money market. I plan on dumping the money market back in the market in the coming year should a correction occur. During the vicious bear of late 08 to spring 09 I lost about 30 percent value, I have since recovered it plus made additional investments. Only one of my six mutual funds is still lower than its peak in 2008 it is a REIT.
Great post! For someone who is 70% in cash right now, how would you suggest getting back to a diversified portfolio? If you dollar cost average back in, then over what time horizon?
Well, Jeremy, I had the confidence to jump into the market at the beginning of 10, but unfortunately, the "beaten-down solid companies" I picked were Intel, BP, and BAC. None of those have seen any sort of wave throughout 2010.
Excellent post, Jeremy. When the markets smacked me in the face in 2008, I rolled my asset allocation forward to 100% equities and held firm on my maximum allowable 401k contribution. I have been handsomely rewarded. I'm now at the point where I'm considering rediversification. I don't recommend making moves like I did unless a) you can afford to take losses b) you are a sophisticated investor and are passionate about paying attention to the economy, markets, and your portfolio. Otherwise, you will do just fine over the long-term by plugging away with your diversified portfolio.
I'd like to know where all these stock market bulls were when I was taking flak on my blog in early 2009 for saying it was a huge buying opportunity.
Perhaps they were regularly investing through thick and thin, which is fair enough.
It sure didn't feel like many people were bullish at the time though -- and I made a special note to remember when everyone claimed later they'd been investing all along! ;)
I'm not sure where I sit in the poll, but I started saving in my retirement plan at work (to get the matched funds) for a house starting in 2003. In 2007 we pretty much cashed out and used the money to buy a house, and switched the plan to be my actual retirement fund. So I essentially started buying in 2007 . . . from my perspective it was a great place to start, lots of stuff 'on sale'. By sheer luck my money missed the worst of the dip.
It's hard to get a message through all the pessimism. Everybody is crying and whining about the economy and stock market and are blind to any opportunity. Since 2008 I've had the best investment returns ever, especially after cherry picking some solid companies when they were beaten down. Can you say GE at $7? I'm still holding most of that and it's at nearly $22. Combine that with some apple, verizon, and a handful of others and I'll gladly take it while a lot of people are sulking with their CDs and government bonds waiting for the next great depression. ;)