As you have probably heard, the Dow Jones Industrial Average closed at an all-time high yesterday (14,253.77). The previous high was achieved way back on October 9th, 2007 (14,164.53). If you had somehow been on a tropical island with no access to TV, newspapers, or the internet during that time you would have missed a wild ride.
Some events of the last 5 ½ years (not necessarily in chronological order):
- The housing bubble burst – causing foreclosures, bankruptcies and severe damage to the banking system in this country and the rest of the world – Fannie Mae and Freddie Mac reeling
- Lehman Brothers, one of the oldest firms on Wall St, collapsed
- On March 6, 2009 the DJIA closed at 6443.27
- Bank of America buys Merrill Lynch at a fraction of what it was trading for just a few months earlier
- Some 3 month treasury notes traded (at least momentarily) with a NEGATIVE yield.
- Unemployment in the USA went well over 10%
- Quantitative easing
- Downgrade of US debt – once considered the safest in the world
- European sovereign debt crisis (Greece)
- Flash crashes
- 100+ point swings in the Dow – Volatility that has never been seen before
- 10 year Treasury note yields reached 200 year lows of 1.44%
- Auto bailout
- Bank bailout – “Too Big To Fail”
- Health care debate
- Debt ceilings
I am sure that we could add several items to the list.
During the height of the crisis we sent out emails or wrote blogs multiple times a week. Most of them were meant to encourage good investor behavior and prevent reactions such as selling at what could be precisely the worst time. Virtually every client we spoke to was scared – so were we.
I remember there were two concepts I put a lot of faith in at the time:
- It is impossible to predict when the market would turn around
- When it does turn around, it will turn around very quickly
I must admit that my faith in what the textbooks said about proper investing behavior during bear markets was being put to a serious test. In November 2008, I wrote this blog: http://atlantaplanningguys.com/?p=86 (I also remember not being 100% sure that I believed what I was writing). In it, I laid out four keys to investing over the next year. They were:
- Review to see that our clients’ investments are diversified. A mix of large, medium, and small companies. Domestic and foreign. Equity, fixed income, and alternative. Are there any gaps in allocation?
- Pay close attention to small cap investments. This asset class has typically been the first to rally when past bear markets have come to an end.
- Fixed income may be an important asset class going forward. The spread between corporate bonds and government bonds is among the largest in history. If, or when, these spreads contract, corporate and municipal fixed income investors could be rewarded nicely.
- Stay in the market. History has shown that the turn-around from a market bottom can be very rapid.
No one could have imagined that March 9th, 2009 would be the bottom. No one could have imagined that the market would go from 6443.27 on that day to end 2009 at 10,428.05 (a gain of almost 62%!) and to close on March 5th 2013 at 14,253.77 (a gain of over 221% in less than 4 years). As recently as November 26th 2012, TIME Magazine published an article titled “Why Stocks are Dead and Bonds are Deader”.
The market closing at a high shouldn’t be an indication that “everything is okay”. We should fight the urge to forget about what we just went through and avoid looking at this as the “time to get in”. Instead, we should remember some key lessons:
- The market can go up and down – and it can do both quickly and without warning
- Financial crises are a real threat. They happen periodically. Most people will go through multiple crises in a lifetime of investing
- Systematically adding money to a retirement account during a market downswing will be rewarded if the market turns around
- Diversification is important
- Predicting what the market will do over a short period of time impossible – Financial publications and TV channels are entertaining, but are consistently poor market forecasters
- Real estate prices don’t always go up
- Managing downside risk is just as important to the long term success of a portfolio as capturing upside returns