Bring on the fireworks! As of this month, the Standard & Poor’s 500 has nearly doubled from its March 9, 2009 low of 683. The investing public is now in a euphoric state of mind where nothing seems to be daunting the stock market—not even turmoil abroad which would have likely caused the market to panic in the past. (This time around, the market barely hiccupped.)
Although this is great news as the economy continues to be in full recovery mode, I’d like to warn you not to throw caution to the wind. Be careful and watch your portfolio closely over the coming months.
The old adage is “Buy low, sell high.” However, statistics show that most investors get in after it’s too late, therefore buying high and selling low. The market has doubled since March 9, 2009, so by most standards it’s fairly high at the moment. Unfortunately, if you haven’t owned stocks for the last couple of years, you’ve missed the boat—at least this time around.
However, if you already own stock and have taken advantage of the recent run-up, I’m not necessarily suggesting that you pull the plug now (although I wouldn’t be opposed to it), but you do need to have a plan so you know what to do if (or rather when) the market corrects again. More importantly, you need to be diversified so that when the market does have another downfall, you won’t lose your shirt.
The stock market is not for the weak of heart or the impatient. As Warren Buffet said: “Unless you can watch your stock holding decline by 50% without becoming panic stricken, you should not be in the stock market” and “If you don’t feel comfortable owning something for 10 years, you shouldn’t own it for 10 minutes.”
Unfortunately, most investors tend to have short memories and only remember that the market has done well recently while shrugging off bad news. Since this is what we are experiencing now, I want to remind you of what has happened in the past by tossing out some historical data provided by Standard & Poor’s 500 (www.standardandpoors.com).
Last Friday, February 18, 2011, the S&P 500 closed at 1,343. But the market was at this level in June 2008 as well before crashing nine months later to a 52% loss by March 2009. And, if you look back even further, you’ll notice that the S&P 500 was at this same level (1341) on November 20, 2000. Therefore, if you bought into the stock market in November 2000, you would have had a break-even decade of ZERO return.
Let’s review the early part of the decade. The S&P 500 was at 829 at the close on February 3, 2003, but it had been at 1,164 just 11 months earlier. This accounts for a quick loss of 28%. Furthermore, if you look back to March 20, 2000, you would see that the index was at 1,527, which means the three-year loss was around 46%. Could you stand to watch your portfolio decline by nearly 50% in just a few years? Maybe Buffet had a good point.
If we go back to the late 1980s, to November 30, 1987, you will notice that the S&P 500 closed at 223. But did you know that just three months earlier, on August 10, 1987, it was at 333? This is a loss of 33% in three months! What if that happened again in the next three months?
What if we go way back over 40 years when the S&P 500 closed at 108 on November 25, 1968? Less than two years later, on May 18, 1970, the market closed down 33% at 72.
If you look at September 11, 1978, ten years later, you’ll see that the market closed at 108. This resulted in another break-even decade. Wouldn’t it have been better to have your money safe and cozy in the bank earning something as opposed to earning nothing in the market?
Starting to see a trend?
There have been multiple times in recent history that the market has had rapid and dramatic losses and multiple break-even decades. Don’t invest blindly believing that it won’t happen again. The fact is that there is a whole universe of conservative investment options that are designed to yield 4% to 7% without the risk of the market and it would be wise for you to check them out.