Happy Three Year Anniversary!

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The Good News The stock market bottomed out on March 9, 2009. What has followed has been very impressive.

Three years ago on March 9, 2009, the stock market dropped to a low with the Dow Jones Industrial Average closing at 6,547.05 and the S&P 500 closing at 676.53. It was an awful day that came at the end of a downright terrible six-month steep decline that included the collapse of Lehman Brothers, the government takeover of Fannie Mae and Freddie Mac, and a great uncertainty of what calamity would happen next. I had spent these six months assuring investors that the market always recovers, and that the best course of action was not to panic and sell stocks but rather to rebalance the portfolios which meant selling fixed-income investments and buying stocks.

Then out of nowhere, starting on March 10th, stocks began to rise. There was no news of a recovery already beginning or a magic solution that would take care of our woes with the wave of a wand. No news anchor reported that this was the bottom and now it was the time to get back into stocks. In fact, Time magazine’s cover that week read, “Holding on for Dear Life.” What happened was enough opportunistic investors realized that stock prices had no business being that low. There was no rational way to justify those prices. Of course there were plenty of irrational ways to justify those prices which is why many were willing to sell their shares. So the irrational or emotional decision makers sold their shares to the rational that day.

What happened next was nothing short of amazing. Three years later, the Dow closed at 12,922.02 and the S&P 500 closed at 1,370.87 on March 9, 2012. In other words, not including dividends, the major US stock indexes have basically doubled in three years. (The Dow Jones is up 97.4% on a closing basis, but dividends push the gain to over 100 %.) There have been bumps along the way and plenty of negative news to keep some investors away from stocks, but the fact remains that those who remained in broadly diversified US stock investments have more or less doubled their investment in three years when they very easily could have sold their stocks like so many others did.

Of course, even as one of the most impressive bull markets ever was unfolding before our eyes, investors were extremely cautious. The news media had plenty of negative news to sell. Stories of Bernie Madoff, the seemingly never-ending BP oil spill, high unemployment, the possibility of a double dip recession, growing income inequality, a European sovereign debt crisis, and the downgrade of U.S. Treasury debt keep reinforcing to investors that times were not better and that their decision to sell stocks was the right one. The phrase I kept hearing from investors was that they were waiting to get back into stocks “when they felt better” about the market. Ironically, what would make them feel better was to see stock prices go up which meant missing out on those gains.

I also heard many investors tell me that they would never see the market reach a new high in their lifetime. The all-time closing high is 14,164.53 for the Dow Jones and 1,565.15 for the S&P 500 set on October 9, 2007. Now, a mere three years from the bottom, the market is within striking distance of breaking these records. It was very easy to think linearly three years ago instead of cyclically. The constant bad news followed by market decline followed by more bad news and more market decline led investors to predict the future of the market as a downward sloping straight line. What happened instead is what has always happened throughout the course of time, markets go up and then down and then up and down again, constantly changing but in a generally upward direction. In times of panic it’s easy to lose long-term perspective and see that the short term declines are probably part of larger cycle.

The lesson to learn is that, in the past, the market has always recovered. The recovery may not be as fast as you like and you may not be able to see how it is possible, but history shows that patient and disciplined investors have generally been rewarded for sticking to their plan. Although no one can predict the future, having an advisor who is not emotionally attached to your money and can give you rational wisdom in a time of crisis could be the difference between a wild story that you can look back and laugh at and a failed retirement plan.

Rick’s Insights

  • It is very easy to think linearly instead of cyclically.
  • In the past, the market has always recovered.
  • Patient and disciplined investors have generally been rewarded for sticking to their plan.

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