The four most expensive words in the English language are “this time it’s different.”
-Sir John Templeton
Nearly a full decade has passed since the stock market bottomed on March 9, 2009. Back then, our firm had been in business for all of 10 months! Talk about interesting timing.
Since then, the stock market has basically gone straight up. Well, that’s not exactly true, but that has been the narrative until very recently. The pullbacks we have experienced over the past 10 years were pretty much old news before most people even realized what had happened. Every pullback was quickly followed up by another upward move.
It may surprise you to learn that someone investing in the S&P 500 on January 1, 2008 – the first day of the worst year for the stock market since the Great Depression – would have earned over 8% on an annualized basis through November of this year1.
Out of sheer curiosity, we looked back at the headlines in the Wall Street Journal on March 9, 2009. We came across this one: “Dow 5000? There’s a Case for It.” To put this into context, at the time the Dow Jones Industrial Average was trading at a level of 6,547.05. Similar to the more relevant S&P 500, the Dow Jones Industrial Average is the barometer most people use to measure “the stock market.” We like to think in percentage terms, so what this headline meant was that there was a case for an additional 24% decline. Keep in mind that on this date, the Dow had already fallen over 50% in the previous 16 months.
As you can imagine, or may recall from personal experience, very few people had much interest in investing in stocks at this time. Those of you who have worked with us long enough to experience any sort of market correction know that our advice about tough markets is always “stay the course.” Despite that advice, throughout 2008 and early 2009, we heard “This time it’s different.”
Well as we all now know, instead of declining another 24%, the Dow just about quadrupled, right up to the 4th quarter of 2018. Which takes us to present time, where it closed at 22,445.327 on December 21, 2018.
Thanks for the information…so what?
As we have stated time and time again, it is a natural instinct to act irrationally when it comes to investing. Human beings are hardwired to make bad investment decisions. This is due to a combination of things: the pain of loss exceeding the thrill of gain, as well as our need to make sense of the world around us by making predictions…even when such predictions (e.g., the near-term direction of the market) are pointless and impossible to get right. Indeed, the best investors are not exceptional market-timers; rather, they are disciplined enough to not take significant risk with money they will soon need, and to stare scary markets in the face and stay the course, or even double down. Now, the point of this piece is not to suggest putting all of your money in the stock market tomorrow. Things could certainly get a lot worse before they get better. More importantly, you should never have money that you will need in the next few years in the stock market in the first place. We take care to help clients figure this out and craft an appropriate asset allocation for each portfolio.
We work with many clients who are retired. We’ve often had to remind them that, even if the stock market dropped like it did in 2008, and stayed down for several years, they’d likely still have enough money in safer investments (such as bonds) to meet their living needs.
When you invest in stocks over the long run, you can usually expect to grow your money at a substantial rate. But there is also a near-certainty that your investments will decline in value over certain time periods.
If you know this going in and you have a sound asset allocation strategy, pullbacks like what we have seen this quarter should not concern you. The reason “this time is different” is so dangerous is pretty simple – every stock market decline in the history of this country was followed by a recovery. While the past does not guarantee anything in the future, we have a lot more confidence in the long-term viability of the U.S. stock market than we do in our – or anyone else’s – ability to pick and choose when may be the right time to get out of harm’s way.