The U.S. stock markets have provided a wild ride over the past year. The S&P 500 stock market index recently posted its best five-month gain since 1938. Yet many people missed out on this. And no wonder.

During the previous five months, the market suffered one of its greatest five month losses, which understandably made investors gun-shy. In fact, many were shoveling money out of stocks instead of into them and so missed the turnaround.

Here are some actual numbers:

  • From 01 October 2008 to 28 February 2009, the S&P 500 fell from 1164.74 to 735.09, a decline of 36.89% in five months.
  • From 01 March 2009 to 31 July 2009, the S&P 500 rose from 735.09 to 987.48, an increase of 34.33% in five months.
An investor’s paradox: As I write this (on August 20th), the S&P 500 has closed at 1007.37 — up 37.04% since March 1st. Roughly speaking, the market has now risen as much in percentage terms as it had fallen. But note that a 37% drop followed by a 37% rise does not get you back to your starting point.

I’m curious how the market fluctuations affected real people. I don’t mean professional investors or financial pundits, but small investors like you and me. Did people panic? Did they stop contributing to their retirement accounts? Did they pull money out? Or did they actually contribute more?

Over the past couple of months, several people have left bitter comments at GRS complaining that they know folks who “lost their retirement savings” in the crash, and sometimes insisting that I not promote the stock market as an investment vehicle. While I appreciate their concern, I don’t share their skepticism. I’m not convinced the market is broken.

Instead, I’ve tried to ignore my own trepidation, have tried to keep in mind Warren Buffett’s maxim: “Be fearful when others are greedy, and be greedy when others are fearful.” This has required a leap of faith.

Over the past year, I’ve consolidated several of my retirement accounts. I’ve taken money that was scattered in a variety of places and swept it into one account. As a result, I’ve posted two major transactions at Fidelity since last September.

Last September 29th — just days before the bottom fell out of the market — I moved about $46,000 into FFNOX, a collection of four index funds. I paid $24.20 per share. I thought I was getting a great deal.

As the market collapsed over the next few days, I felt sick to my stomach. I felt like I had made a terrible mistake. Like many of you, I wondered if I shouldn’t move my money someplace “safe”. But I didn’t do it. Instead, I placed my faith in the advice I’ve been reading for almost five years now. Though I’m well aware that past performance is no guarantee of future results, I took comfort in the record of long-term stock market performance. By early March, I’d become almost stoic about my losses.

When FFNOX bottomed out at $15.46 on March 9th, my investment in it was worth only about $29,000 — a decline of over 40%! By then, however, I wasn’t worried about getting out; I was worried about getting in. I knew that the second half of my retirement accounts was nearly ready to be moved, and I hoped I could invest the money soon. My reasoning was that if I could buy while prices were low (and I had no way of knowing they had actually bottomed out), maybe I could recover some of my losses when (if?) the market began to rise.

I wasn’t able to invest more money until May, however. By then the market had begun to rise — significantly. On May 7th, I bought roughly $49,000 worth of FFNOX at $19.82.

My cost basis for these two transactions at Fidelity — for the bulk of my retirement savings — was $95,020.05 for 4436.069 shares, or about $21.42 per share.

And where is FFNOX today?

As of August 19th, FFNOX is worth $22.44 per share. That’s still $1.76 per share below the price I paid for my first lot, but it’s $2.62 per share more than I paid for my second transaction. This retirement account is now worth $99,545.38, which is $4,525.33 more than my cost. That’s an increase of 4.76% during “the worst economy since the Great Depression”.

But that increase would not have been possible if I hadn’t been able to overcome ignore my fear of uncertainty. (And I’ll admit that there’s a part of me that worries the markets will crumble again tomorrow.)

Important note: I’m not saying that you should buy now — or that you should have bought in May (or March). I’m not qualified to make those sorts of recommendations. You need to make investment decisions based on your own circumstances and your own risk tolerance. If you need advice, consult with a financial professional.

Now that the economy seems to have turned the corner (or has it?), I’m curious how others reacted to the stock market turmoil. Did you pull your money out? If so, have you put money back into stocks? Did you stand pat? Did you make additional investments? What choices did you make — and why?

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