An Investing History Lesson
The key going forward is to learn from past behaviors and avoid repeating previous mistakes.
Senior Vice President
Look back ten years ago for a moment. It is the start of 2007. George W. Bush is president, the Dow Jones Industrial Average is at 12,400, the Fed Funds rate is 5.25%, and financial confidence is high. Anyone owning a house is feeling wealthy as home values continue to ascend.
By June, the Dow passes 13,000 and as summer weather arrives, groundbreaking on the Chicago Spire begins. This skyline-changing symbol of wealth and prosperity is planned to rise above all. Then Steve Jobs unveils the first iPhone—a life-changing product that would connect everyone, change industries, and empower the consumer.
In the month of August, the sports world sees Tiger Woods claims his 13th major championship and Barry Bonds hit his 756th home run to surpass Hank Aaron's 33-year-old career record. In September, the Dow passes 14,000 and "Dow 20,000" becomes a media-fueled catch phrase. The year 2007 seems like a party. Not a dot-com internet party circa 1999, but a real one. A party largely based on real estate that everyone at the time presumes never goes down in value. Buy a big house, buy stocks, and then buy another house; this is normal thinking for much of 2007.
October would see the stock market reach all-time highs with the Dow closing at 14,164 and the S&P 500 Index closing at 1,565 on October 9th. Little did anyone know, it would mark the beginning of the 2008 Financial Panic. As such, October 9, 2007 can easily be considered one of the worst days in history to have bought stocks. This was only ten years ago. Do you remember it all? Do you remember what financial moves you made? Were they moves based on facts, or moves motivated by greed or fear?
The Dow and S&P 500 indices would go on to lose over half their value over the next 17 painful months until finally bottoming out on March 9, 2009. For most, the thought of recovering the wealth that vanished at that point seemed impossible. Everything about our economy—even capitalism itself—was questioned.
The cause of the collapse, the basis for recovery, and how things supposedly changed as a result are debated by leading economists even today. But for investors, the more important matter to consider regarding these events is the behaviors and decisions that were made to either contribute to, or detract from, investment success. Imagine if, on that day 10 years ago, you knew what the future held. You knew that large financial firms would disappear and others would be taken over by the government; that unemployment would hit 10%, and the deepest recession since the crash of 1929 would unfold. With this knowledge, where would you have put your money? Would you have invested in stocks or bonds, or perhaps cash? Would you have invested in real estate? Perhaps you would have put your money under the mattress.
What would have happened if you had bought stocks 10 years ago, on October 9, 2007—one of the worst days to do so since the Great Depression? With a decade of results available, we can see what would have come of this terribly unlucky timing. An investment in the S&P 500 index on that day would have ‘suffered’ a 7.2% annualized return over the next 10 years.1 That is correct: up 7.2% per year.
It is easy to discuss in hindsight what should have been done. Nonetheless, sitting tight and doing nothing would have resulted in temporary, albeit severe, paper losses, but not permanent losses. Of course, doing so would have been easier said than done considering what was happening at the time. It certainly was not the first major bear market; it was just the most recent. The dot-com crash that began in March of 2000 resulted in a 49% pullback for the S&P 500. Black Monday—the crash on October 19, 1987—saw a 22% decline which would be equivalent to a 5,100 point drop in the Dow today. There have been others, and there will certainly be more to come.
Attempting to predict the exact timing of the next market pullback and completely avoid a downturn is folly. However, by interpreting information appropriately and unemotionally to take advantage of opportunities and minimize downside risk, disciplined investors have been handsomely rewarded over the past decade. For those not so fortunate, the key going forward is to learn from past behaviors and avoid repeating previous mistakes, especially during times of stress.
Whether it is a sale for a tax benefit, investing cash at attractive prices, or possibly just sitting tight, in the land of opportunity there is always investment opportunity, in every market climate.
1. Annualized returns assume reinvestment of dividends.
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