“I can’t go through another 2008.” This is a comment I hear quite often. That year represents a generational financial scar we can never hide. A defining event that continues to shape the behavior of most of us today.
People dial these bad memories up anytime they see high volatility in the markets. I, in fact, believe this is a good thing. It has kept people from getting overzealous, like we saw during the tech and housing booms.
While I believe we’ll likely see higher stock prices by the end of the year, let’s pretend we are about to experience another great recession like we saw a decade ago. Should you run for the hills? I definitely understand that nobody wants or enjoys the emotional rollercoaster that a rapidly declining stock market brings. It is highly emotional to watch your nest egg lose 30 to 50 percent of its value.
The problem is nobody can consistently predict when it is time to run for the hills. People have suggested to do so dozens of times over the last decade, including at the bottom of the market in 2009. Another problem is you have to get back in, and that is difficult as well.
One behavior pitfall we tend to make is that we look back to the highest point of our investment portfolios, and lock that in as our losing point. That losing point was likely preceded by years of gains. We tend to leave the preceding gains out of the equation. It’s more important to see what your return has been over the preceding 10 years.
Another aspect to consider is to look at what different major asset classes have done over the last 100 to 200 years. Stocks have far outpaced the returns you would have experienced from staying in cash, gold, or government and corporate bonds. Even if you invested all your money in stocks at the very top of the market in 2007, preceding the financial crises, your stocks would have done better than those other assets.
The biggest problem has been that many people aborted their investments during the large declines, and either came back late or never returned. If there’s one lesson to be learned from the past, it is the best way to fight the inflation of goods and services you buy every year is to be and stay invested in stocks.
For the vast majority of Americans, the current or future income streams you will need from your investment assets in retirement require the enormous appreciation power that stocks provide. With that power comes periods of great uncertainty and dismay, but like having kids, the investment is worth all the trouble.
(Past performance is no guarantee of future results. Advice is intended to be general in nature.)