We’re just days away from the 10th anniversary of the start of the bull market recovery, and most investors can’t remember exactly how they felt back then.
Chances are, however, that one of the following adjectives applied: Miserable, gloomy, crestfallen, pathetic, anguished, agonized, dejected, despondent, distressed, tormented and/or broken-hearted.
Those words all were appropriate considering that stocks – as measured by the Dow Jones Industrial Average – had lost 54 percent of their value in just 17 months. In the last few days before the market bottomed out, the Standard & Poor’s 500 lost 8 percent of its value, a final push that had even some of the most diehard market advocates bailing out.
The numbers were ugly. Both market observers and financial advisers used expressions like “lost decade” to describe what investors had been through with two relentlessly destructive bear markets in less than a 10-year span.
Once March 9 passes, however, flashbacks to those bad times will mostly cease.
They will fall off of 10-year investment track records, completely out of the standard time frames viewed by most investors, replaced by some of the sexiest numbers in investment history.
When those final bad days leading up to the 2009 market bottom come off the track record, it is highly likely that the 10-year annualized average return for the S&P 500 will stand at 17 percent.
You have to go back to the days when the Internet bubble was peaking to find a 10-year stretch that good.
Plenty of experts are reminding investors how that run ended, and forecasting a downturn now for stocks too, but the mainstream predictions remain at least cautiously optimistic, if not downright bullish.
Economic conditions are positive – even if they’re not quite as rosy as their numbers from a year or two ago – and even the worst forecasts wouldn’t send investors all the way to those despairing feelings, but investors should not forget the troubled times, even as they are relegated to 15-year track records.
Just a few months back, the average annualized 10-year gain was closer to historic long-term norms, roughly 10 percent for the S&P. It still included those final downdrafts of the crisis.
Because the crisis spared no sector or category, virtually every investment category and asset class will see its long-term track record look as healthy as it has been this century by the end of next week.
As investors, it’s important not to forget the past, because markets go in cycles.
Even with a healthy economy, downturns have not been repealed or eliminated. One need only go back to the discomfort felt in December to recall just how bad it feels when the market starts to act like it might be out of control.
Moreover, while the investment track records look completely healthy now, many investors struggled to ever get past the crisis. They were scared out of investments when times got tough and missed much of the rebound.
Yes, the performance-enhancing drug of time has numbed the pain of the past, but investors need to make sure it is not forgotten.
For anyone buying a mutual fund, one of the best questions to ask before plunking money down is “What’s the worst that could happen,” a question typically answered by examining a fund’s losing years.
It is incumbent on investors to look back – beyond 10 years – to see how investments performed during the crisis so that they can be prepared. Did a fund do better than its peer group when the heat was on, or did it ride the wave in good times and drown in the crash that followed?
Looking at that performance is crucial to developing peace of mind and the courage to stick with something the next time the market starts dishing out trouble.
One thing no investor should plan on is for the next decade to look like the last one.
Investors are wise to keep their expectations in line with long-term history – roughly 10 percent for large-cap stocks, a bit better for small-caps – or even just beneath those levels than to assume that recent past performance is prologue for what’s next.
As a general rule, the market is up over decade-long periods.
Most times when investors are shown charts showing long-term losses or flat stretches – and a lot of retirees are seeing those charts in dinner presentations hyping insurance products – they’re looking at index performance that excludes dividends.
That’s ridiculous, because you’re going to accept/reinvest whatever dividends you get paid.
But it’s equally silly to equate a simple statement that the market’s direction is likely to be “Up” over the next decade with the idea that a rising market gains 17 percent annually on average.
Even if you want to say that the bull market ended in December, when stocks declined and dragged the whole year’s performance sharply negative, the January bounce-back has made this rally feel indestructible again, like every setback is a buying opportunity.
The 10-year return numbers minted after March 9 will only reinforce that feeling.
Don’t fall for it. Use the anniversary as a reminder that if things have gone better than you planned, it’s time to cull some winnings, rebalance the portfolio and get back to the allocations you planned.
Don’t buy into the hype that tells you to expect the strong run to continue unabated, but don’t give any purchase to the idea that strong upward trends die of old age and that their demise always comes at the hands of a steep decline.
Get inside the numbers. Know the performance you need to reach your goals and come up with a reasonable plan for achieving that, one that you help along with extra savings, rather than hoping that the market can save for you.
Just because you can’t see trouble in a long-term track record doesn’t mean there isn’t any coming in the future. If thinking about this anniversary is painful, prepare now to avoid those feelings the next time trouble comes calling.