“I’ll just wait until things calm down, then I’ll get back in the market.”
This was the refrain I heard from one investor after another from September ’08 through March ’09. Some folks who said this to me had already bailed out of the market. Others were contemplating it. And in all cases, it was based on the following assertion:
It is clearly so different this time – so much worse, so much more dire – that any fool with eyeballs can see it. And it would be complete insanity to stick around in a stock market that is clearly just, well, broken, when I can save what money I’ve got left and hide out in my money-market fund until there is some evidence that the ship has been righted.
Truly, it all seemed so logical in the emotion of the moment, when the best thing about weekends was that the stock market wasn’t open.
So today, brothers and sisters, it is my great joy to bring you good news! Almost one year to the day after the collapse of Lehman Brothers…
THINGS HAVE OFFICIALLY CALMED DOWN!
I do not base this on mere opinion. In fact, the news today was a veritable cornucopia of items that make the case, to wit:
• The widely followed Empire State Manufacturing Survey’s business conditions index came in at 18.88 in September, the highest level since late 2007, from 12.08 in August. That’s up from a low of -38.23 in March.
• Fed Chairman Ben Bernanke essentially declared the recession over in a Washington Speech.
• The Libor-OIS Spread, a gauge most experts think is the best indicator of credit-market health, returned today to 0.11, its five-year average from the period before Lehman collapsed. (For comparison’s sake, it peaked last October at 3.52)
• The CBOE VIX index of market volatility fell to 23, a level last seen before the failure of Lehman. (For comparison, it peaked at 82 last October, a level best described as “widespread panic.”)
So I think we can all agree that things look a lot better today than the dire straits that drove millions of investors from the market from September through March.
Now, though, for those who bailed out of the market, I am afraid I must also be the bearer of some bad news:
While you were waiting for things to calm down, the Dow Jones Industrial Average gained, from its March 9 low through September 14, let’s see, um…
Fifty percent.
Hold on, it gets worse: The Russell 2000 Index of small U.S. stocks gained…
Seventy-six percent.
It’s not like this took years to unfold. It took, in fact, a mere six months. Six measly months to recover what would ordinarily be a half-decade’s worth of returns. Six skinny months from what conventional wisdom told us was the brink of financial Armageddon to, “Eh, not so bad…”
Thus, while things are calmer, they sure aren’t any clearer for those who bailed out of the market and are wringing their hands trying to figure out when to get back in. In fact, for those on the sidelines, things today are a lot less clear than they were back in March.
So…what to do? If you are one of those folks who is stuck in the mud trying to decide when to get back in the market, my advice is to quit focusing on the market and start focusing on yourself. Don’t worry about where the market is today compared to where it was when you got out and where you are afraid it might be in another six months. That is the mindset that got you into this mess in the first place, and your paralysis will only increase with each passing day no matter what the market does.
Focus, instead, on what your goals are – your long-term investment objectives – and where you stand today in relation to those goals. Perhaps you find that you really don’t need as much growth to sustain you in your golden years as you once thought, in which case you needn’t plunge all of your money into the stock market anyway.
On the other hand, if you still need a healthy dose of stock exposure to achieve your goals, then…plunge away. You may be wrong in your timing – you may well get back in just in time for another downturn – but in the long run you will have removed the single biggest impediment you have to successful investing (your own emotions) and will be back in the market knowing that, sooner or later, you’ll be glad you got back in.
(And you will stay in this time…right?)
3 comments
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September 17, 2009 at 1:20 am
Graham
yI must thank you again for the advice / counseling session. We followed yyour advice and are reaping the rewards! You da man!
October 20, 2009 at 9:42 am
George
Wait a minute, wait a minute! If I had $100,000 in equities and got out before a 65% plunge and I am still out you’re making me feel like this is bad??? If I were down to $35,000 I would need a 300% rise ignoring any subsequent investment to be back to $100,000. Yes, the markest have rallied 50-75% since March, but all of the people who I know who stayed in are still hurting.
October 20, 2009 at 7:05 pm
jackcalhoun
George –
Thanks for the comment. You make a major assumption that merits further inquiry: “…got out before a 65% plunge.” It’s true that if you bailed out of the market when the Dow was at 14,000 in October ‘07, you would be a lot better off than if you had stayed the course and were now looking at Dow 10,000 two years later.
I don’t know anyone who did that, however, including nearly all of the world’s professional money managers. Most of the individual investors I talked to, and read about, panicked after the market dropped from 11,500 to about 8,000 in early October ‘08 and bailed out. Many more individuals panicked during the long, brutal slide early this year from 9,000 to 6,500 and then bailed out. Anyone who did that is now looking at a market that is somewhere between 25% and 50% higher than it was when they got out, and now has to decide whether this is a “real” rally or a “fake” rally.
That really was the point of my post. People panic when they think all is lost and tell themselves they’ll get back in when things are “calmer,” but by the time things are calmer the market has usually already achieved much of the gains it is going to see in a new bull market, and then it is too late.
– Jack