Today is March 9th. Do you remember where you were one year ago today? I do.
It was a Monday. I was sitting in my office answering phone calls. Phone calls from a couple of clients who just reviewed their February account statements over the weekend.
February, 2009 was one of the worst months for stocks since the 1930s. February was also the sixth month in a row that the stock market was down. By Monday, March 9th, things only seemed to be getting worse. On that day the S&P 500 hit a new low for the bear market. This wasn’t just any low. It was a 12-year low!
The mood was bearish. Investor confidence was low and people were dumping stocks like crazy. Some believed we were going to see another Great Depression. One of my clients actually told me that he believed America was going to go out of business.
Both of my clients were ready to “draw a line in the sand.” They were determined not to lose any more money in the stock market. Of course, these weren’t actual losses until we sold the stocks. They asked me for my outlook. They asked me what we should do.
Not knowing at the time that this would be the day the market would decide to bottom, and then surge 68% over the next year, I advised both of my clients to stay put. I was confident that the market was getting close to a bottom and thought this would be the absolute worse time to sell stocks.
Client: “But, Adam, we just can’t afford to take losses!”
Me: “Then don’t take them!”
Client: “But, Adam, let’s sell our stocks and go to cash. When things look better and the economy looks stronger, we’ll get back into the market.”
Me: “OK. Sounds good in theory. How will you know when things are better? What will you be looking for?”
Client: Silence. “…Well, I don’t really know. I guess we’ll get back in when I feel better about the economy and the market.”
Me: “By then it’ll be too late. You won’t feel better until the market has already made a significant rebound. If you sell today, you’re missing out on an opportunity to benefit from a recovery.”
What I should have said: “Dude, you’re about to make the worst mistake of your life.” [My thoughts were no different on March 9th, than they were when I wrote this post on February 11th.]
So, what did my clients decide to do? Well, first you should know that whenever we take on a new client we talk about the possibility of market downturns. We talk about volatility risk. We talk about the ups and downs of the market and discuss how our clients might react during downturns. We try to prepare for things like this. But, as much as you try you can never simulate reality. The reality of living through this bear market was tough…for everyone. It took patience, faith, and discipline to ride it out. Thankfully, both clients decided to stay the course at a time when they felt like giving up.
As it turns out, they made the right decision. The S&P 500 is up 68% from the bear market bottom a year ago today. Had these clients sold their stocks they would have missed out on the V-shaped recovery that Brian Wesbury predicted. The 68% return for the S&P 500 is the best rolling 1-year return for the index since the 1930s!
So what’s the lesson? Fear and greed are an investor’s two worst enemies. In a bear market, fear can lead you to sell at precisely the wrong time. Great investors take the Warren Buffett approach and buy stocks in a bear market.
Never, never, never let emotions dictate investment decisions. Selling out of fear, and buying when things feel right, will burn you every time. You must have a strategy for investing. And then, follow it! Don’t give up on a sound investment strategy during the tough times.
A sound investment strategy starts with a philosophy that dictates the type of investor you are. Are you a long-term or short-term investor? Are you a trader? Are you a value or growth investor?
Once you settle on an investment philosophy you need to have a process. What types of investments will you buy? When will you buy? What is the criteria for an investment you will make? When will you sell?
At our firm we offer investment strategies. Every strategy we offer has a philosophy and a process that dictates when we buy and sell. Our goal is to eliminate the emotions from our decision making. And, I can tell you it’s not easy. I can recount several times where we’ve let our emotions override what the strategy was telling us to do…and we made a mistake. But, I can also show you the times when we invested contrary to what our emotions were telling us to do and it worked!
Photo by Sad Guys on Trading Floors
Chart by Bespoke Investment Group