A Lesson In Investing History: How Will You Respond Next Time?
In our office, we celebrated privately the passing of the four year anniversary of what would be a 13 year stock market low point.That’s right, it has already been four years since March 9, 2009 when the S&P 500 Index closed at 676—a level last seen in the summer of 1996. As of the date of this article, the S&P 500 Index has surpassed its all-time high of 1565, which was achieved in October 2007!While the financial headlines have remained extraordinarily negative, the equity markets have improved substantially. The S&P 500 has appreciated by more than 130%, while small capitalization stocks and international stocks have advanced by nearly 180% and 90% respectively.What should I do?The last four years have been an amazing period of investment performance for stocks. However, we distinctly remember those “fight or flight” urges in early 2009, as the financial markets seemed to be collapsing before our eyes. We were repeatedly asked the question by clients, “What should I do?”We believe it is helpful to review the productive actions taken by investors during this time period in order to determine the actions that we should prepare to take during the next stock market decline. So what decisions were made four years ago, that have proven to be beneficial? Here are a few:Maintaining a disciplined investment approach. Keeping your focus on the long-term, by avoiding actions which would ultimately prove to be harmful to your financial health. Continuing your systematic investment schedule. Rebalancing your portfolio (buying stocks on the cheap!). Avoiding the temptation to sell out of the market or making other rash and emotion-fueled financial decisions.Staying diversified. At the time, while assets of all types seemed to be in free fall, the benefits of diversification seemed negligible. However, as the financial markets began their recovery, certain categories of stocks and bonds outperformed others. History has proven that the benefits of maintaining a globally diversified portfolio are enormous from both a risk and return standpoint.Emphasizing financial planning decisions. Making prudent financial planning decisions during the Great Recession has proven to be very beneficial. Converting IRAs to Roth IRAs, refinancing mortgages at historic low interest rates and maximizing portfolio tax-efficiency by employing an effective tax loss harvesting strategy were great financial planning actions that are continuing to pay off as the economy and financial markets strengthen.History may not repeat Itself, but it rhymes…Wouldn’t it be nice to always operate with the benefit of hindsight? Fortunately, when it comes to investing, we do have the benefit of hindsight to a certain extent. In fact, when looking at data since 1950, there have been 11 years whereby the stock market has experienced intra-year declines of 20% or more. The good news is that in every case, stocks have rebounded and surpassed their previous highs.For most of you, there will undoubtedly be another period of time in which the stock market will experience a significant decline. While no one looks forward to these challenging periods, it is important to prepare yourself mentally and emotionally for the next decline. Doing so, will help you stay focused on the long term and take advantage of those rare opportunities that are presented.