April 2, 2020
Here is a story I recount to people. It reinforces what to do and not do with your investments.
There was a couple, let’s call them the Jones’, who owned a portfolio of 50% equity mutual funds and 50% bonds. This couple and their portfolio had endured the dot.com tech boom and bust, the 9/11 attacks and the market declines from the accounting scandals. They then profited from the market rise from 2003 to 2007.
Their confidence was shattered in 2008 when Lehman Bros collapsed. They suffered a $75,000 loss on a Lehman Bros bond. (Not an equity fund – a bond.)
Having suffered that bond loss and now having much less confidence in the financial system, they nonetheless continued to hold their mutual funds.
If you recall, the Financial Crisis market bottom occurred on March 9, 2009. By continuing to hold their portfolio, they began to participate in the markets inexorable rise. And they held their funds until May 2010. The “flash crash” happened on May 10, 2010 and on May 20, the couple told their financial advisor to sell the last of their equity mutual funds.
They just couldn’t take the volatility anymore. Volatility fatigue had set in. They could not diffuse it. So, they bailed. And for a while they probably felt some comfort. They had sold. The volatility was gone – there was less to worry about.
I wonder how long it was before they started noticing the equity market rising… and rising. At some point, I suspect they began to experience regret for something they did but later wished they had not done.
So, to recap, they held during the dot.com bust, 9/11, 2001 -2003 – the tough times, they held through the Financial Crisis to the bottom, held through the early part of the recovery and were scared out of the market by a one hour – ephemeral – market disruption.
Since May 20, the “market” – let’s use the S&P 500 index as the proxy – has risen from 1071.59 (let’s just round it to 1072) to yesterday’s (4/1/20) closing amount of 2470. That’s a 130% increase in value (without counting dividends).
That’s an average annual return of about 8.8% - again, not counting dividends. Throw in 2% for dividends (again rounding) and you get 10.8%
And this 10.8% is after the market has done a power dive from 3386 on February 19, 2020 to the present 2470 – a 27% decline in just about 30 days. The fastest market decline … ever.
What did the family earn in their bond holdings and CD’s since 2010? There is no way of knowing (without asking them). But if they had a diversified portfolio of bonds since then, it is possible that they may have earned about 3.85%.1
So, 10.8% vs. 3.8% over 10 years. That makes quite a difference in your retirement spending.
Markets are volatile, especially now. People who hang in there, avoiding the emotional pull to “do something” because “this time is different” or “I just can’t take it anymore” typically have a much higher probability of avoiding regret than those that panic and bail. Remember, markets can be volatile to the upside, too.
Opinions expressed are those of Michael Magnuson and not necessarily those of Lincoln Financial Advisors.
This story is hypothetical and for illustrative purposes. It is not indicative of any particular investment or performance and actual results may be different. Diversification may help reduce but cannot eliminate risk of investment losses. There is no guarantee that by assuming more risk, you will achieve higher returns.
S&P 500 index data from FinanceYahoo.com. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. It is a market value weighted index with each stock's weight in the index proportionate to its market value. Past performance isn’t indicative of future performance. An index is unmanaged, and one cannot invest directly in an index.
2 Source: Wall Street Journal, July 12, 2010, “Investors Flee Stocks, Changing Market Dynamics”