The stock market has recovered, but have you?

The financial media world is all abuzz with U.S. stocks — as measured by the Standard & Poor's 500 — surpassing where they were in October of 2007, right before the Great Recession and a more-than-50 percent plunge.

It took more than five years, but better that than never. Pity the poor investors who invested in the Nikkei 225 (the main index of Japanese stocks) at its 1989 peak. It's still down almost 70 percent, even though Japan was the globe's second-biggest economy through most of that period (until being surpassed by China a few years ago).

So you might think that if you invested $100,000 in the S&P 500 back in October 2007 — perhaps by owning shares of the Vanguard 500, an index fund that attempts to match the performance of the S&P 500 (and a fund I own) — you'd have just $100,000 now. Your investment grew zilch. But it's probably not quite that bad, because market indexes just measure the change in the prices of stocks and not the dividends they pay. A dividend is a share of a company's profits that is paid to its owners. And remember: When you own a share of a company's stock, you are a genuine, honest-to-goodness part-owner of the company.

Most of the companies in the S&P 500 pay dividends (the other companies keep the money to reinvest in the business to make it more valuable). And most investors use those dividends to buy more shares, which leads to more dividends, which can lead to more shares. For investors in the Vanguard 500 who have reinvested dividends since Sept. 30 2007, their $100,000 investment would now be worth almost $115,526, according to Vanguard. Not an impressive return to earn over five-and-a-half years, to be sure, but it's better than nothing.

But Wait — There's More!

Ideally, dividends weren't the only way investors were buying more shares. Those who were continued to contribute to their 401(k)s and IRAs were purchasing more shares as they declined and then rebounded. Assuming an initial investment of $100,000 and monthly contributions of $500, an investment in the Vanguard 500 would now be worth $161,348.

Of course, this is all predicated on being able to keep saving during the recession. Unfortunately, many people couldn't, due to job loss or other financial difficulties. Also, plenty of companies suspended the 401(k) match, which means many people weren't able to take full advantage of the drop in stock prices.

Also, retirees were in the opposition situation — having to withdraw money as the market sank, rather than buy more shares. This is why we Fools recommend that retirees have an “income cushion” of five years' worth of expenses they expect to come from their portfolios out of the stock market and in cash or short-term bonds. This keeps the money you needed in the next five years safe, while the retiree waits out a bear market.

You're Not an Index

So while following the ups and downs of a market index can be worth keeping an eye on, it's only one piece of your personal puzzle. Whether you bought, held, or sold has just as much impact on your current net worth as well as what type of investments you owned. The metric you should be regularly monitoring is the “Will I Meet My Financial Goals” Index, a very personalized and fluid calculation that factors in how much you have, how much you're saving, and then matches that up with what you need and when.

More about...Investing, Retirement

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rjack (Mr. Asset Allocation)
rjack (Mr. Asset Allocation)
7 years ago

The individual investors who stuck with their Asset Allocation Strategy where reward handsomely despite the 2008 Financial Crisis.

If you don’t have a solid Asset Allocation Strategy, I strongly suggest that you get one now and stick to it.

Jon @ MoneySmartGuides
Jon @ MoneySmartGuides
7 years ago

I agree with having the right asset allocation and learning to ignore the noise and stay invested. Our clients that heeded our advice surpassed their 2007 highs by the end of 2011 all because of taking advantage of investing when the market is down and not selling out.

Ross Williams
Ross Williams
7 years ago

“When you own a share of a company’s stock, you are a genuine, honest-to-goodness part-owner of the company.” That isn’t really true, you are just an investor. You have no more influence over how the company is run than its individual customers, probably less. In both cases, the only real influence was the choice to stop doing business with the company. That isn’t true for “genuine, honest-to-goodness” owners of a business. If you invested in Vanguard Funds, then the money managers at Vanguard were the part-owners” of the companies you invested in. Because they had a lot of stock, they… Read more »

TB at BlueCollarWorkman
TB at BlueCollarWorkman
7 years ago

Haha, it’s funny that I never knew what S&P 500 stood for. You just sorta hear that on the radio, “And the S&P 500 is down today…” but no clue what it is! Standard & Poor’s 500. Now I know.

Barbara
Barbara
7 years ago

My understanding of the five year buffer has always been that it’s there in case of market declines. If the market is doing well, you would pull your required living expenses from your invested assets. In times of market declines, you would use the buffer to prevent depletion of the your invested accounts since the values have decreased. Once the markets get back on track, you would act to rebuild the five year cushion. Is that not right? According to the comment above, you should always be spending from and replenishing the buffer, which – as he says – makes… Read more »

Ely
Ely
7 years ago
Reply to  Barbara

you are right, I think Ross misunderstands.

Although I agree with him that you are never without risk, you can certainly reduce your risk in various ways, a buffer being one.

Ross Williams
Ross Williams
7 years ago
Reply to  Ely

@Ely Using your buffer when the market is down, while not adjusting your spending, is essentially gambling on the market going up before you run out of money. In fact, it is counting on it going up enough that you will be able to both pay your current expenses and replenish the buffer. Under that scenario, if you had a 5 year buffer in 2008, by now you would have maybe, very roughly, a 3 year buffer left. If the market starts down again, you will need to dip into that already depleted buffer some more. If that three year… Read more »

Peter
Peter
7 years ago

I’m kinda of lost at the point of this article. I understand the point that you need to ride out the downs of the market, and that a 5 year swing really isn’t that bad if you didn’t sell low and you have a cushion built into your plan.

Just feels like an unfinished article, maybe its just the title that doesn’t seem to fit.

Anyone else?

WWII Kid
WWII Kid
7 years ago
Reply to  Peter

I agree – I thought it was all about how I was feeling now that the market has snapped back, i.e., am I investing more or differently, etc.

Can I have my 5 minutes back?

Elizabeth
Elizabeth
7 years ago
Reply to  Peter

I had the same reaction… It seemed unfinished to me.

Alex C
Alex C
7 years ago

I bought an index fund as the market was crashing. While everyone was rushing out of the stock market, I was trying to fivourously collect as much money to buy in to the stock market. One thing that clouds people’s mind because of the fear of losing money is that when the stock market is low, it means everything is on sale. Nobody goes to a grocery store, sees a sale and runs out of the store. They do exactly the opposite, they buy more of them. That is exactly what I did with the stock market during 2007 and… Read more »

Jacob@CashCowCouple
7 years ago
Reply to  Alex C

Yeah, it’s time to buy when everyone hits the panic button. I think the reason most people don’t understand the concept is because they watch garbage like MAD Money every night. Avoiding TV news/commentary is the place to start.

Ross Williams
Ross Williams
7 years ago

The time to invest is when you have money to invest. The time to sell is when you need money to spend. There is no time that is a good time to to try timing the market.

Jon @ MoneySmartGuides
Jon @ MoneySmartGuides
7 years ago
Reply to  Alex C

This is a great analogy. I think people sell out of the market when prices drop because they “see” that their $10,000 investment is now only worth $5,000. They fear losing the other $5,000 so much they sell out. What they don’t realize is that the $5,000 is only a paper loss, meaning you only truly lost that money when you sell. If they would just turn off the TV, focus on something else and forget about it and stay invested, they would see their investment grow.

My Financial Independence Journey
My Financial Independence Journey
7 years ago

The ups and downs of the stock market don’t really bother me very much any more. I invest for specific reasons according to an actual investment plan. So long as my investments deliver dividends I don’t worry about what the price does. If they cut the dividend, they’re sold and the capital is redeployed elsewhere.

Ross Williams
Ross Williams
7 years ago

WARNING! Nobody has lost money investing in the stock market since the crash in 2008, yet. It was the folks who invested before the 2008 crash who lost money. They were feeling quite smart about their investment strategies up until that point, especially if they bought into the market heavily after the crash in 2000. But by the time the market bottomed out in 2009, every investment made in an S&P 500 index in the previous eleven years had lost money. When the market is at record highs like now, we are all winners. But, unless you sell, the wheel… Read more »

William @ Bite the Bullet
William @ Bite the Bullet
7 years ago

Warren Buffett famously has said we should be GLAD when the market goes down, because then we get everything we buy for our “retirement” (whatever or whenever or however that might look) at low prices. The only thing that counts is where prices are when I want to cash out. Logical? Yes. But not easy. We unconsciously project today’ status into the future. If prices are up now, we think they will always be up. But it doesn’t mean they will actually be up next month, or year. And, if stocks/mutual funds are my investment of choice, I need to… Read more »

Marsha
Marsha
7 years ago

This is true, but it’s hard to do in real life. We lost a lot of money–on paper–in 2008. It was so tempting to cash out what was left and leave the market, but we kept telling ourselves that paper losses didn’t matter since we were 15 or more years from retirement. So we stayed and kept investing, and our investments look very plush in the current market. But once again, that’s only on paper. We’d be better off if the market was lower since we’re continuing to invest new money in it. It’s all psychology. I have to remember… Read more »

Ross Williams
Ross Williams
7 years ago

Most of us aren’t Warren Buffet. We aren’t trying to make money as our goal. We want money for what it can buy.

mike
mike
7 years ago

Bantha poodoo

Sam
Sam
7 years ago

Yes, we’ve fully recovered, in our market investments, from the 2008 crash and investments we purchased in early 2009 are doing especially well (not b/c we are smart but b/c they were such bargains).

Our real estate investments have not recovered.

Diane C
Diane C
7 years ago

Happy to say that having an extremely balanced portfolio meant that it “recovered” years ago. I kept adding to the pot during the recovery and am now way ahead of my 2008 numbers. Just bought a new home (short sale) and sold my existing home for well over asking, which was close to the peak value. The real estate market is improving. If you’re looking to sell, now is the time to declutter and start preparing your home for market.
Also agree that this article looks like someone hit the “send” a little too soon.

Tiara
Tiara
7 years ago

I bought all the way down during the crash and my portfolio is now looking pretty good, but I know it’s no guarantee for the future, and there will be more ups and downs to come, forever. Set your asset allocation and stay the course.

Mr.Bonner@bonnersbillions
7 years ago

I’m a little torn here. Mr. Brokamp’s articles are usually some of my favorites on GRS, but this one falls short for me. I was hoping for a little more substance than the 5 year cushion. I get what he’s saying, but I’d like to see something more along the lines of what the Fool sees as interesting investment opportunities when the market is high.

Tony@WeOnlyDoThisOnce
7 years ago

There are also those who panicked during the crash and tried to cash out (at least partly). It still is reassuring to see the indexes in good shape, but great point about individuals not being represented by the overall trends.

@pfinMario
@pfinMario
7 years ago

You would have had to have been very brave to go all in at the heart of the crisis… But if somehow you were the one guy who knew that was the bottom, then sweet

HealthnSmoking blog
HealthnSmoking blog
7 years ago

if not your funds was tied up mainly in financials that are no longer around, it will all come back in time. In history, the market forever rises. As for pull out and just holding cash that assume that you’re an specialist on market timing. You already know that you’re not, or you would have pulled out more than a few months ago. Trying to decide when to get back in isn’t any easier.

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