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.
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.)
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?
This article is about Investing, Real-Life, Retirement
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I was 100% invested in equities before (and during) the crash. At some point I’d lost enough to buy me a Porshe. I didn’t budge.
I started reducing my spending in order to pile up some cash in case of an emergency or buying opportunity showed up. I must admit I was paralyzed in March 2009 and couldn’t pull the trigger.
So I ended up with a fair amount of cash on the sideline as the market recovered, but I’m glad I didn’t sell any of my equities. Fortunately I had no casualty in my portfolio (all my banking stocks were very conservative).
Since then, I did find a couple of buying opportunities but the market caught me by surprise before I could deploy all my spare cash.
My equities are still below water, but my net worth has finally set a new high as of july 2009, thanks to the market rally and my aggressive savings.
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“Look at Sarah, post #140 – She says she “saw the crash coming” and moved most of her money to safety in the crash and is still up 10%. So many of the pros didn’t see this crash coming and lost their shirts.”
Actually, I said two things: I moved my 401K funds before the market crashed in September 2008, but I had already taken losses, and I underestimated the crash. My one stroke of financial genius was dumping Fidelity Magellan, which was one of the worse hit funds.
But I still kept 2/3 of my 401k in stocks, and they got hit hard. But last month the value of my 401k came back to the level of all my contributions since 2003, for a net profit of $0 after investing for 6 years.
The 10% profit is in my non-401k stock portfolio. The market seemed irrational when the market started plummeting in October 2008, and I felt that much of it was seriously undervalued. I took far too much of my savings, and continued throwing money into it during the bad months.
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JD et al, re dollar cost averaging vs. lump sum, this moneychimp article spells it out, with a calculator:
http://www.moneychimp.com/features/dollar_cost.htm
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“…It is no more complicated to tell people when stocks are inanely overpriced than it is to tell people when cars or comic books or bananas are overpriced…”
When exactly IS a banana overpriced? I often think that fruit in general (technically I guess bananas aren’t fruit, if I remember correctly) but I’d love to know for sure.
Isn’t it trying to time the market if you put more money in it when it’s “down”?
I’m not going to put less in when it’s up so why do the opposite?
I can see putting more money in the retirement account for the sake of having more saved up but really, isn’t anything else just another way of market timing?
I didn’t really lose any money in the crash. The value of my investments did go down an awful lot (about 40%) but I never sold and locked in my losses.
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When exactly IS a banana overpriced?
Isn’t it trying to time the market if you put more money in it when it’s “down”?
You’re asking great questions, Jonas. They get down to the nitty gritty.
A banana is overpriced when it is selling for more than its fair value. It’s the same with stocks.
I presume that the point that you are making is that it is not possible to say with precision when a banana i overpriced. If one store is charging 65 cents per pound and another is charging 70 cent per pound, it is hard to say which price is right. Similarly, if stocks are selling at one time at a P/E10 of 14 and at another time at a P/E10 of 16, that is hardly a big deal.
But what about when you go to a store that is charing $2.10 for a pound of bananas? Do you pay that price on the thinking that “no one knows the right price anyway”? Most of us do not. With things other than stocks, there are limits to what sorts of prices we are willing to pay without feeling that we have been ripped off.
The reason why we are suffering from an economic crisis today is that we failed to apply that simple common-sense reasoning to the purchase of stocks. Stocks were selling at three times fair value in January 2000. The historical data indicated that the long-term return on stocks purchased at those prices was likely to be a negative number. But the “experts” told us to just keep pouring our retirement money into an asset class providing a negative long-term return. They hurt us big time by doing that and we hurt ourselves big time by letting them get away with it.
Yes, it is timing the market to consider price when buying stocks. People need to get over the idea that “time” is a four-letter word. To time the market is to take price into consideration. To fail to time the market is to fail to take price into consideration. To fail to take price into consideration is reckless. It follows that to fail to time the market is reckless. Those who fail to time the market are putting their portfolios at grave long-term risk by doing so.
All of the confusion re these points stems from the fact that academics learned in the 1950s and 1960s and 1970s that short-term timing does not work. They jumped to the hasty and unfortunate conclusion that no form of timing works. Then the academic research of the 1980 and 1990s and 2000s showed that long-term timing always works. But we have seen a great reluctance among the “experts” in this field to acknowledge the mistake. Hence, the greatest loss of middle-class wealth that we have ever seen in the United States and the economic (and political?) crisis that we have seen follow from it.
Rob
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My wife and I didn’t change anything. I kept our existing investments where they were and we both kept contributing to our 401(k)’s and whatnot. Basically we deliberately ignored what the market was doing. My wife is rather risk-averse, so basically her willful ignorance is the only way I can get her to invest in stocks at all. (Her grandmother left her enough money to pay for college – but my wife refers to it as “my grandmother played the market”)
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I’m 24 and just started investing. I’m sort of angry that I was only able to get about 30% gains on my investments. I wish I took more risks and invested more on those cheap bank stocks when I had the chance. I could’ve really made out then. For my parent’s generation this stock market crash has been a disaster. For me I’ve taken it as a gift.
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@ Mike #157
“I wish I took more risks and invested more on those cheap bank stocks when I had the chance. I could’ve really made out then.”
Mike, hindsight is 20/20. It’s easy to say and think that you could have or should have done more, but 30% up is fantastic. While it is possible that you could have tripled or quadrupled your money in some cases, just remember that some banks that seemed impenetrable 12 months ago are ancient history now. I had watched Washington Mutual for years and almost took the plunge for them when they dropped from $40 to $2 or so, but I listened to financial commentators who warned me away from bank stock. WaMu (WM) is gone now, and so would my money have been if I had tried to get in when their prices fell. Things were just totally unpredictable for quite a few months and there was no telling which banks would survive and which ones would fail. You did well at 30%. Stay vigilant and don’t be afraid to consolidate those gains by selling some of your equities. Investors always need an exit strategy (know when it’s time to sell or rebalance their accounts), so now might be a good time to consider one. (I rode the tech boom up 600% and rode it back down to a net 0% from ’94 to ’00 thinking it would “come back” while it was falling. It didn’t. )
In my humble opinion, this market is still due for a major correction, so keep some powder dry, keep that cash available for when it does. No market goes straight up forever, and this market has skyrocketed lately. There are still some financial shoes to drop which could drag this down pretty significantly, so you may still have your chance to be a little more risky if you hang tight.
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You have to hope that the majority of people are back to a more traditional view of having a healthy respect of the risk in stocks. The 1982-2000 super bull market really caused a lot of people–middle class especially–to abandon good sense and move 80, 90 or 100% of their money into the market.
If you really want a reasonable idea of the true cycles of the stock market, you really need to study the past 40 years, not just the 80s and 90s. Look at the 1970s and the market since 2000 and you begin to realize that the stock market is no place for people who can’t afford to lose their investment.
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I saw the problems in the market and put everything into short-term T-bills in August 2007. I’ve kept contributing, etc. So I missed the big run down, and the retracement. I’m not getting back into stocks until the fundamental problems with the US economy are fixed. Debt overhang, crazy deficit, a precarious dollar, mass unemployment with 70% of the economy consumer-based, commercial real estate imploding, continuing bank failures, leadership that won’t reform the financial industries, Stimulus 2 and Stimulus 3 on deck.
When the underlying economy looks stable (not “good” or “booming” just “stable”), I’ll get back in. Although, I’m tempted to go for CD ladders and bonds once China forces us to raise interest rates.
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I said in #158
“WaMu (WM) is gone now”
I just found out that WM is now the ticker for Waste Management. [Waste Management Inc., the nation's No. 1 trash hauler, said Thursday it will change its New York Stock Exchange ticker symbol to duplicate its logo. The change from WMI to WM better represents the Houston company's logo, the company said. The new ticker will debut Aug. 5.] from AP.
BloggingStocks says [WMI declared that as of 8/5, it will trade on the NYSE as WM, which until earlier this year designated Washington Mutual. How appropriate that a company that specializes in, um... waste management, has collected this trashed ticker from the curb and will recycle it for its own purposes.]
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Good news guys. Consumer Confidence blew away consensus. Maybe I’m on to something here… the GRS sentiment indicator could be a leading indicator to the bigger consumer confidence index!
“The housing sector also showed signs of life as a national measure of home prices posted its first quarterly increase in three years.
The New York-based Conference Board said Tuesday its Consumer Confidence index rose to 54.1 from an upwardly revised 47.4 in July. Economists surveyed by Thomson Reuters had expected a slight increase to 47.5.”
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I like to approach investing in a split perspective:
Short term
Long term.
I think short term the market was severely damaged, if not broken but that the long term the market would recover. That’s why I ratcheted up my 401k contributions as the market plummeted despite the fact that my company cut its match. I’m about 30 years away from retirement and I figure that if the stock market doesn’t produce significant returns over that period of time, we’ve got bigger things to worry about.
I’ve also taken to heart the horror stories of retirees, or near retirees who’ve lost their retirement savings. This has burned into my psyche that no matter how good times seems, things can turn on a dime and you’ve got to stick to the long term plan and asset allocations, no matter how much it may feel like the good times are passing you by.
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JD:
Wow, what a treasure trove of info, opinions and ideas in this thread, where the responses are as valuable as the article. One minor nit to pick, though. Didn’t you say you were going to throttle down the volcano of words from Mr. Bennett to just two posts per thread, in order to let others get a word in edge-wise? I think you sticking to that agreement that is the only way that this excellent dialog could be improved upon. Thanks!
A frequent reader.
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Didn’t you say you were going to throttle down the volcano of words from Mr. Bennett
This comment is inappropriate. This is a personal attack.
John Greaney got an important number wrong in a retirement study published at his web site. I pointed out that error and Greaney organized a Goon Squad to terrorize every web site and blog that discussed the realities of SWRs or stock valuations in the time since. JD is aware of the ongoing Smear Campaign. I have provided him with the links he needs to know the story.
I ask that the comment above be deleted and that assurances be offered that those who comment at this blog with good intent will be protected from this sort of behavior (numerous defamatory statements were put forward by the Greaney Goons in an earlier thread here).
Rob
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Rob and company: That’s it. Stop. Any further comments for or against Rob in this thread will be deleted. No exceptions.
Yes, #164, I did say that Rob had a limit. However, he’s been a valuable to contributor this site on a number of subjects over the past couple of months. He’s exercised restraint. He did veer toward the edge in this thread, but he didn’t go over it until you provoked him in a conversation that had run its course. I chose to allow him to post more than the hard limit I had set earlier because people weren’t getting distracted by him. I was very aware that he’d posted more than we had previously discussed.
Rob, this comment is not a personal attack. It’s provocative, yes, but it’s not worth getting upset over. You post a lot, and you know it. Your best move in this situation is simply not to respond. If you don’t respond, I don’t have to post this message and everything is fine. This commenter has never left another comment at GRS before (I checked both the e-mail and the IP address), so this isn’t any sort of ongoing harassment. It’s just somebody who doesn’t want to see threads derailed by this pointless argument.
Rob, if you continue to post thoughtful comments and keep your crusade at a modest level, things will be fine. But I’m not going to allow any more threads to get derailed by this bullshit.
A blog is not a democracy. It’s a benevolent dictatorship. I am a very benevolent dictator, but I’m still a dictator. There are certain things I don’t allow. And this nonsense is one of those things.
Again: Any further comments for or against Rob in this thread will be deleted. No exceptions.
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I wasn’t surprised that the market went down, but I was sure surprised by how *far* it dropped. Still, it didn’t alter my financial plan. I follow what many call a “passive investing” approach, with an asset allocation that includes a mix of low-cost index funds (allocated among large cap and small value funds for both domestic and international stocks) and fixed assets.
I also have a regularized system for re-balancing that allocation. It takes a bit of self-discipline, but it prevents me from reacting emotionally or trying to time the market based upon the flavor-of-the-month, be it Tobin’s Q, PE10, a Ouija board, or the financial pornography so abundant on the web.
So, when the market tanked and my allocation to equities dropped below pre-set limits, I bought equities at the expense of fixed assets. Quite a bit of stock, given how far the market dropped.
I’m still at dollar values below where I was when the S&P 500 was at 1500, of course. But I have a fair bit of confidence that the market will act in the future roughly as it has in the past…and I’ll come out of this OK.
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In Jan 09, We bumped our 403b contributions from 8% to 12%, figuring that it was just about bargain shopping time. We hit it pretty close I think, as the total account value is just about where it was before the crap hit last year – of course, that’s including value increase + contributions. It’s been a joy the past few months watching it climb.
J.D., keep up the good work at GRS. My wife and I love it!
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I just posted about my 401(k)– I’m up 29% YTD http://divorceddadfrugaldad.com/2009/08/28/my-401k-is-up-29-ytd-how-about-yours.aspx
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I’d sell. As Mr. Buffet says: “Be fearful when others are greedy; be greedy when others are fearful.”
Now others are greedy.
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This. This is why, when friends ask me for “investment advice”, I tell them that the single best thing they can do is keep some cash on hand (that is, in something like a savings account that can be liquidated without penalty).
When my friends and coworkers were pulling money out of their 401(k)’s in March, I liquidated my holdings and bought. I picked retail sector stocks, since I thought that the market had unfairly undervalued them after the dismal Christmas shopping season, but that doesn’t matter much.
My YTD return on the investment is 24.58%
Warren Buffet was a wise man.
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