Looking back on how I felt in 2009

[RenoJay]

Back on March 7, 2009, I sent an email to a bunch of friends essentially saying not to follow the masses who were throwing in the towel on the stock market. The interesting thing is that one business day later, on March 9th, 2009, the markets hit bottom. So for no other reason than to pat myself on the back for holding it together and for accidentally calling the bottom, I'm republishing the email here. Interesting to note how WRONG I was at the very bottom in advising my friends to avoid treasuries. I didn't discover the bogleheads til a few months later and was still figuring out the concept of asset allocation since at the time I had 90% of my net worth in equities. (As it turns out, I still avoid treasuries but it's easier to make that case today than it was 3 1/2 years ago.) Anyway, I'm glad I stayed the course because my net worth was nearly cut in half and now I'm essentially back to where I was before the Recession even though my house value is down significantly, and now, having learned from the bogleheads, my asset allocation is much more appropriate. Here's the email I sent out. I only addressed it to my friends who were 45 and under, because in case I was wrong I didn't want retirees yelling at me that I had made them stay in stocks when they should have bailed. It's kind of nice to do a gut check and see what we were actually thinking during traumatic financial times, because it helps us figure out our true risk tolerance.


Sent: Saturday, March 07, 2009 10:35 AM
Subject: Stick to the Plan if You're Under 45

All,

This is the third (and hopefully last) of my don't-lose-your-s***-when-the-stock-market-drops emails.

The economic news is absolutely frightening. The stock market is in the toilet. Unemployment rates make us nostalgic for the Carter administration. Good friends of mine...logical, insightful people...are arguing for putting all your (remaining) money into "safe" assets like bonds. I STILL disagree completely and am staying the course. I have not sold a single share of stock, and have continued to purchase with the few pennies I have left. Here's why:

1) Other than the Great Depression, 1973-1974 were about the worst time for stocks most of us know about. But if you had been so unfortunate as to invest all your funds at the top of the market, you still would have been back to even after 2 years. Why? Because as stock prices decline, dividend yields go up. By reinvesting your dividends, you're picking up lots of extra shares at cheap prices. When stock prices do go up, you get a multiplier effect on those extra shares.

2) What if we're not at the bottom yet? Good question. The market is down about 50%. At this point in the Great Depression, there was still MUCH farther left to fall. However, if you would have invested at this point, you'd be back to even in two years and UP 7%/year after inflation for the next five years. When markets hit lows, they typically bounce back up 20-30% VERY quickly. We had a day in October when the market increased 11% in one day. Therefore, trying to time the bottom is a fool's errand.

3) Worst case: What if you invested 100% of your money in the market at Dow 14,000 AND we're headed into the next Great Depression? Judging by the last one, you'd have been back to even in 16 years, not the 25 years you commonly hear about in the press. Why? Again, because of reinvesting dividends while prices were low. Did you actually pile it ALL into the market at Dow 14,000? I didn't think so. Are we headed for another Great Depression? Maybe, but I doubt it based on the crowds I still see at Starbucks and the lack of soup lines in big cities. Therefore, it'll take a while to earn your investments back, but probably not nearly as long as the press would scare you into believing.

Great reference articles:
http://www.marketwatch.com/news/story/Finding-a-silver-lining-Great/story.aspx?guid=%7B08E3BCA1-506B-4A66-839C-C128CFEA6546%7D

http://www.hoovers.com/global/pfc/index.xhtml?pageid=15307&fileid=20090223VALUE_ADDED.xml


I want to reiterate:
---No one can successfully time the market and the predictions of Dow 5,000 are just as speculative as the predictions of Dow 36,000 were during the 90's bubble. Just turn off CNBC and forget about it guessing the number and remember that retirement money is meant for retirement so it doesn't matter what it looks like today.
---Everyone should have an emergency cash fund in case of, well, an emergency. (Job loss, illness, etc.)
---If your finances are keeping you up at night, maybe you should slowly consider changing your mix. (But avoid treasuries....they're in a bubble.) If you do make changes, write down your reasons and emotions and re-read it in a few years when the market is climbing and you're tempted to jump on the bandwagon.

-{Name omitted}

[nedsaid]

It was tough for me. I had been through 2000-2002 and was going through another bear market. As Yogi Berra would say, de ja vu all over again.

Like you I did not sell. I was too scared to rebalance. What I did do was to put 100% of new money in the stock market for a year. Then I went back to my normal plan of investing new money at 60% stocks/40% bonds.

Thank God I did. I emerged from two bear markets in the 2000's with my retirement intact.

Successful investing is largely behavioral. That is not doing stupid things when things look bad. Doing what you and I did is much easier said than done. I was scared just like everybody else. I knew that if I sold at the bottom that I would never have the retirement that I wanted.

Thanks for the post.

[HomerJ]

I was 60/40 stocks/bonds going in...

I'm pretty young, my wife and I both kept our good-paying jobs, so it wasn't bad for us...

I rebalanced once when the DOW went below 10,000... I discovered that was a very hard and scary thing to do... but I did do it...

I knew I should rebalance again when it dropped below 8000 (or at least at 7000!), but it was just too scary. I didn't want to throw away any more of the bond money (which was doing fine), even though I knew rebalancing was the smart thing to do.

BUT... I found putting NEW money into the market was very easy... I changed our 401k contributions to 100% stocks, and we both received pretty large bonuses during that year, which I threw 100% in stocks... In fact, my wife's bonus came the first week of March 2009, so that money has been doubled... very nice...

Having a lot in bonds really helped.... we're currently 50/50... and even a 50% stock market drop only means a 25% net worth loss, and that does help ease the mind somewhat.

[EmergDoc]

I dumped money in all the way to October, then was excited when it came back up toward the end of the year. I was patting myself on the back. Then there was another nasty drop. I wasn't feeling so good then. I didn't sell out (and in fact kept buying), but I don't know that I could have tolerated a much bigger drop in REITs. (They were down 75% at that point.) I was a bit down on March 9th and started a thread here on REITs at about that time.

[BBL]

Thank you RenoJay.

Reminds me of that old saw: "cooler heads prevail".

It is easy to dismiss or discount just how chaotic everything seemed [was] back then. I sometimes pull-up those 2008/2009 threads to get back in touch with the gravity of the situation in [what was] real time.

Remember the 'plan B', 'what should I do now', and 'rebalancing into a black hole' type threads? Weighty stuff. Instructive and well worth revisiting from time to time.

[MathWizard]

I was a distance runner, not so much now, but I remember the feeling at about the 5/8 to 3/4 point in a race, where I
just wanted to quit. I was barely over half-way and couldn't really see much improvement from step to step. After the 3/4 point,
I always got a boost with the idea that I only had to do 1/3 of what I had already done, and I could complete the race.
The only way for me to get through that 1/8 of the race was to put my head down, and just keep a steady pace, in other
words, just put myself on autopilot. If I had sped up or slowed down during that time, I would have ended up quitting.
This is even worse with the exponential nature of investments, where most of the dollar growth comes at near the
end of the accumulation phase when you have a big balance.

In 2008-2009, I rebalanced into equities when the DOW dipped below 8000. I didn't need to rebalance after that.
I did not like what I saw going into March 2009, but I would have had to abandon my strategy if I pulled out at that point, so
I stayed with my plan, since I had no better plan, and no time machine to go back and implement that plan.

I did increase cash reserves during 2009, but otherwise I did not change my plan.

My plan may not work, but you have to do what works for you.