Class in Back in Session: Did you learn from 2008?

Here we go again. Extreme market volatility has come back to the markets over this summer. Unfortunately, we have had to endure yet another nasty and rapid decline in the world’s stock markets. Fear and pessimism once again are dominating the headlines. With all of this going on, I believe that now is a good time to ask ourselves how well we learned our lessons from 2008.

Probably the biggest lesson from 2008 is to keep your emotions in check. Many investors sold in a panic when stocks were at their lows back in late 2008 and the beginning of 2009. Sadly, many are doing the same thing right now. I have been in this business for over 20 years and have seen my share of bear markets. During this time, I have never seen a client get it right when it comes to market timing during a downturn. Those who get out may miss the absolute bottom, however, they never get back in until after the market rallies and is at a higher level than when they exited. In every case, missing all or a portion of the rebound resulted in them having less money in their accounts down the road. As generic as it sounds, staying the course does prove to be an effective strategy over the long term.

A recent study of 401(k) participants by mutual fund giant Fidelity Investments confirms this point. The study concluded that investors who sold equities during the market volatility in 2008 and 2009 did worse than those who stayed in stocks. The study showed that 401(k) participants who dumped stocks from October 1, 2008 to March 31, 2009 (when the S&P 500 dropped 31%) and had not returned to equities as of June 30, 2011, had an average account balance increase of just 2%. Those that maintained some equity allocation in their accounts during the same period saw their balances rise 50% on average.1 Even a temporary exit from the market was enough to damage future account values. Participants who exited the stock market completely, but then returned to some level of equity allocation after the market decline, saw an average account balance increase of only 25%.2

So here we are today confronted with the same type of uncertainty and fear as before. The question is; did we learn anything from 2008? No doubt we have some serious headwinds facing our economy. Now, however, is not the time to panic out of the stock market. If you plan to reduce you stock exposure, do it later, after the markets recover, not now in the midst of a downturn. Exiting stocks during a downturn has proven over and over again to be a losing proposition.

1. Bloomberg, Selling Burns 401(k) Investors Who Dumped Stocks, Fidelity Says, 8-18-2011
2. U.S. News & World Report, Planning to Retire, 401(k) Savers Who Stuck to Stocks Saw Gains, 8-19-2011