It has been well documented that during the Global Financial Crisis (GFC), many individual investors panicked, sold the bulk of their investments and sat in cash waiting to get back into the market. If you asked them, they would tell you they were looking for a “safe” time to get back into the market. And between an economic slowdown in China, stock market volatility in the US, uncertainty over the U.S. Presidential election, etc., they perceive the current market as decidedly unsafe. However, they, like many other investors in the past, will tell you they will get back in when the “all clear” sign appears.
Of course, nobody is qualified to give that signal! In fact, the lack of clarity in the market is exactly what creates opportunities for gains. That’s easy for some to forget in times of volatility and stress.
Anyone who yanked money out of the market during the GFC not only locked in portfolio losses, but did not participate in the post-crisis rebound. Accordingly, they have a lot of ground to make up compared to investors who stuck with their diversified portfolio. It may not feel like it, but the market has fully recovered since the GFC as you will note below:
- The market high was reached on October 9, 2007, before the GFC. The S&P 500 Index and Russell 2000 Index closed at 1565.15 and 845.72, respectively.
- The market continued to fall until March 9, 2009, when the S&P 500 Index and Russell 2000 Index closed at 676.53 and 343.26, respectively, for a decline of 56.8% and 59.4%, respectively, since the market peak on October 9, 2007.
- On April 15, 2016, the S&P 500 Index and Russell 2000 Index closed at 2080.73 and 1130.92, respectively, for a gain of 207.6% and 229.5%, respectively, since the market bottom on March 9, 2009.
I’m not saying that the annualized performance since November 2007 is impressive. Rather, my point is simply that anyone who bailed out and stayed in cash for any period of time is that much further behind their more disciplined peers. Especially when you consider that today’s historically low interest rate environment means safe harbors like certificates of deposit, etc. earn next to nothing.
Staying disciplined requires resisting the emotional urge to flee to cash. It also means regularly rebalancing your properly diversified portfolio. That means you sell some of your winners and buy some more of your losers. Yes, that is counterintuitive to many investors, but it’s the only way to keep your asset allocation in line as volatility spikes.
And it sure beats selling your losers and locking yourself out of the market’s eventual recovery!