What Happened if You Got “Spooked by Stocks”?

A reminder of how emotional decisions often cloud our judgment as investors.

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Nearly every article you read talking about the events of 2013 mention the fabulous return of the U.S. stock market. The Standard & Poor’s 500 Stock Index, which is one of the most closely tracked benchmarks, rose 29.6% for the 12-month period ending December 31, 2013. It was the largest percentage gain since 1997. It was the fifth year in a row of positive returns for the S&P 500 Index.

Reading articles about the 2013 stock market return remind me of an article written in January, just 4 years ago. The January 9, 2010 issue of the Lancaster Intelligencer Journal featured an article titled, “Spooked by Stocks” (see my article about it from last year). The U.S. stock market had bounced back in 2009 from a massive sell off the year earlier. The story talks about investor’s reaction to the recovery. A retired roofing contractor sold all of his stock positions, because he was sick of the volatility and the crooks on Wall Street. The investor said he moved all of his money into bonds. You probably haven’t read anything about the bond market return in 2013. The Barclays Aggregate Index is the most widely followed bond index. It finished the year with a 2.03% loss.

This is a reminder of how emotional decisions often cloud our judgment as investors. It was not fun owning stocks in 2008. It is easy to understand how a little recovery in 2009 could be seen as an opportunity to get out. Successful investing is not about getting the timing right (owning stocks when they are going up and sitting on the sideline when stocks are going down). Find the right balance between stocks and bonds. Stick with your allocation through the ups and downs of the market and use the extremes to rebalance. Avoid the temptation to time the market, which is often just your emotions trying to take over.

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