Stock Market Lessons A Year After the Low
March 9, 2009, marked the low of global stock markets around the world. Since then, most markets have made a substantial (and fairly sharp recovery) and are up by about 80%. What have we learned since then and how will it affect investment strategy going forward. Here are some of my observations:
–Going down and coming back up are not the same — despite the sharp rallies over the past 12 months, most markets are still below their all time highs of a couple of years ago. The sharp percentage increases are somewhat misleading. After all, if a market declines by 50%, then from the bottom rises by 50%, you’ve only reached 75% of your original value. Unfortunately for typical investors, markets have returned poorly when a cumulative of 10-year performance is considered.
–Panicking does not help — I know of several investors (advisors and columnists) that scolded individual investors for having too much allocated to stocks and riskier investments during the sharp down drafts. This meant that many people bought bonds last year, and some shifted investments from stocks to bonds, which meant they didn’t participate in the market rally. I think this indicates that markets will continue to move upward over the next couple of years, although not as continuously as last year.
–Timing the markets are hard – markets tend to anticipate economic or earnings news. Thus, if you waited for positive news on the economy to dip your toe back into the stock market, you would have missed out.
–Markets recover unevenly — in my portfolio, emerging market stocks have done well. Unfortunately, some funds that I own have not recovered the bulk of their losses. I plan on spending the next few weeks deciding if I should prune some losers out of the portfolio. Laggards are fine, losers are not. I maintain an overweight position on emerging markets and commodity stocks, largely on a view of uneven economic growth favoring China and India.
--Transaction costs add up — as this is my third major bear market, I did not do too much tinkering with my portfolio. I know a lot of people who did. Not only were they a candidate for suffering from panic, they also incurred substantial transactions costs. Learning to sit tight in the face of volatility is something that has helped the performance of my portfolio over time.
shared at this week’s Carnival of Personal Finance
You’re right. Panicking does not help. While most people were selling when the market tanked, we kept on buying on a monthly basis (though we were loosing money as well). We figured since we’re in for the long-term (20+ year), we can afford the fluctuations.
Jersey Mom, continuing to buy monthly will likely turn out to be a very good move 20 years from now. Thanks for commenting.
[...] It’s hard to believe it’s been a year. ElizabethG from Modern Gal teaches us Stock Market Lessons A Year After the Lows. [...]
I have been through four major bear markets and dollar cost averaging has saved me again. When the market tanked, I doubled my monthly contributions and my portfolio has just recovered this month. It was disheartening losing more each month than I was contributing, but this really paid off in the recovery.