What a Difference a Year Can Make
It’s been a little over a year since the market hit bottom. In the past when we’ve experienced sharp sell-offs, they usually are followed by significant upturns. We weren’t cheated this time around as the S&P 500 is now up over 71%. The DFA Global Equity Fund, a good proxy for the global stock market is up over 88%.
If you stuck to your guns during all of the turmoil, you should congratulate yourself. If you sold after September of ’08, the only thing that you did was lock in your losses and risk not being in the market when the turnaround began. Unfortunately over the course of the year I have heard many stories of people who sold during this time and only now they are beginning to think that the great market returns are a reason to get back in. Too late.
Despite the markets, I tend to be a little more skeptical. I’m smart enough to recognize that we are still within a secular bear market, but humble enough to know that I don’t know which way the market will turn next. We may have seen the bottom a year ago, we really won’t know until we are looking at this in the rear view mirror. But I wouldn’t rule out another testing of lows either. This is the nature of how a secular bear market works.
Now is the time to personally ask yourself the tough questions. What will you do if the market goes down again? Think about it, stocks can drop 40-50% again. If your stock portfolio gets cut in half, will emotion take hold and you will sell right in the middle of the turmoil? If you think you would flinch, this is a far better time to take risk off the table rather than during the next panic. The great mistake is most individual investors don’t take stock of their tolerance for risk and then become clairvoyant on which way the market will go at exactly the wrong time. This action has depleted far more wealth than the markets have ever inflicted. This is the time to be proactive. I encourage you to think about this now.