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
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%7Dhttp://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.