We’ve learned from Hurricane Harvey and other devastating storms that when the authorities tell you to evacuate, it’s best to get out of town, where there is no threat of catastrophe. But this is not the strategy we need to use for stock-market storms.
Human nature sometimes works against us when it comes to putting money in an investment and keeping it there for a while. When many investors watch the news and see that the market is fluctuating, their first instinct can be to panic and move that money out of the stock market and into a different class of investment. But your best bet is to leave it right where it is.
Stocks Grew Even During the 2007 Economic Crisis
Case in point: stocks invested 10 years ago, during one of the worst stock market performances in history, have done better than you might expect. In August 2007, when the global financial crisis began to erupt with the halting of withdrawals from some BNP Paribas funds, it launched an 18-month period of wealth destruction and economic peril.
Many investors bailed out of the stock market. But those who held tight for the next few scary years made out pretty well. In the 10 years since that crisis began, the Standard & Poor’s 500 index has returned 7.8 percent, annualized, including dividends. That’s not far below the very long-term average yearly return of just under 10 percent. In fact, investments left in the stock market during that time did better than some other investments:
|10-year total return||Maximum pullback|
|Aggregate Bond Index||+4.3%/year||–9.8%|
In this market downturn, investors were helped by “the most aggressive central bank support programs ever conceived, a long corporate profits boom and one of the longest bull markets in history, which has taken equity valuations to the upper end of their historical range.”
From the Calm to the Storm
In the summer of 2007, there was a decent bull market following the tech meltdown of 2000–02. Stocks had been rising nicely for five years, gaining about 12 percent a year with dividends. And the market was reasonably valued, at 15 times forecast earnings for the following year ¾ a similar multiple as a few years earlier and comfortably below the current 17.8 times. Investment gurus often noted the lack of retail-investor participation as a reason that stocks had plenty of room to run higher. On August 9, 2007, the BNP fund closures sparked a swift stock sell-off.
Here is a summary of what happened next. You can see what great restraint it took for the wise investors to keep from bailing out of stocks:
- In December 2007, two months after the market crested, Wall Street strategists still predicted a 10 percent gain for the S&P 500 for 2008. They were wrong!
- The financial strain spread from subprime mortgages, to the entire credit market and then to the real economy. Stocks were liquidated, losing 20 percent from their peak and earning bear market status by mid-September 2008.
- On September 15, 2008, Lehman Brothers filed for bankruptcy. With $639 billion in assets and $619 billion in debt, Lehman’s bankruptcy filing was the largest in history. The result was unprecedented tumult of the financial system and an all-out liquidation of stocks.
- Stocks bottomed out in March 2009 with the Dow just under 7,000 after a number of erratic rallies. The investor who got into stocks on Aug. 9, 2007, was down 47 percent, and the conservative Vanguard Balanced fund was off 26 percent, in just 17 months.
- At many points up through 2010, the trailing 10-year return on U.S. stocks was negative, making many investors question whether the market would ever be a wise investment again.
- In 2011, the European debt crisis and debt-ceiling standoff, combined with a variety of recession scares and reports of anxiety from the Fed, prolonged investors’ worries.
Yet after all that, a standard portfolio allocated with 60% equity and 40% fixed income returned a decent 6.8 percent over the same span, with roughly half the downside volatility experienced by the S&P 500.
What can we learn from this? The clear message is to be patient and not let emotional reactions to market fluctuations dictate your moves. The passage of time in the markets can help make up for bad timing. So when your “fight or flight” instinct kicks in, choose “fight” ¾ fight the inclination to flee the market! A trusted advisor can help navigate this.
We take a proactive approach to managing income and cash so that you should not have to liquidate then we experience corrections. Please contact us with any questions on your portfolio or if we can otherwise be of service.
Randy Carver (440) 974-0808 or firstname.lastname@example.org
The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Randy Carver and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Past performance is not a guarantee of future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
. Michael Santoli, “Investors Posted Solid Returns Even if They Bought Just as Financial Crisis Erupted 10 Years Ago,” CNBC, August 9, 2017, https://www.cnbc.com/2017/08/09/even-if-you-bought-just-as-the-global-financial-crisis-erupted-10-years-ago.html.
 “Case Study: The Collapse of Lehman Brothers,” Investopedia, February 16, 2017, http://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp.
. Santoli, “Investors Posted Solid Returns….” CNBC.