It’s often said that investors have shorter memories than a full stock market cycle, so they are perpetually surprised by market booms and corrections.
But most investors over the age of, say, 35 today probably remember what is euphemistically referred to as the Great Recession – the bear market of 2007-09.
Nevertheless, let’s refresh our collective memories. Most of the major market indices reached all-time highs in September 2007. After that, investors were rocked by wave after wave of bad news, that started with defaults on low-credit mortgages but quickly turned into a complete market meltdown. Liquidity more or less evaporated, major financial institutions were on the brink of insolvency, and economists rightly wondered whether we were entering another depression.
A few of the more subdued headlines from the period below:
“Markets in Disarray as Lending Locks Up”
Washington Post, September 18, 2008
“Citing Grave Financial Threats, Officials Ready Massive Rescue”
Washington Post, September 25, 2008
“Bailout Plan Rejected, Markets Plunge, Forcing New Scramble to Solve Crisis”
Wall Street Journal, September 30, 2018
“Markets in Panic Mode”
Los Angeles Times, November 21, 2008
“New Fears as Credit Markets Tighten Up”
Wall Street Journal, March 9, 2009
In early 2009, President Obama failed to get a larger stimulus bill passed, and the bailout of the US automakers went through. The Dow Jones Industrial Average, which had hit an all-time high of just over 14,000 in October 2007 and dropped to just over 9,000 at year-end 2008, bottomed out at just over 6,500 on March 9,2009. That represented a “peak to trough” decline of over 53% in about 18 months.
As an investor, what would you have thought in March of 2009? Next stop, “Dow Jones 2,000”? Joking aside, there were respected market observers who were convinced that the market no longer had a floor, and that with liquidity so scarce, valuations were almost irrelevant.
Let’s now look at monthly returns for a mutual fund that we use in many of our clients’ portfolios, DFA US Small Cap Value (ticker symbol DFSVX). As the name suggests, this is a fund managed by the leading investment manager Dimensional Funds, which is invested in small US companies whose share prices seem to be undervalued.
October 2008
-22.1%
Uh oh. What’s going on here? What’s a “CDO”?
November 2008
-13.0%
Uh oh!
December 2008
+5.3%
Whew. Now we can get back to a booming market.
January 2009
-14.3%
Was last month a “dead cat bounce”?
February 2009
-12.7%
Why isn’t my broker returning my calls?!
March 9, 2009
Sell my stocks, I’m going to save what I have left…
March 2009
+10.4%
Another dead cat bounce, not gonna fool me again.
April 2009
+19.7%
Arrgh! I can’t ever get my market timing right!
If you’re confused by this graphic, what it shows is a return on DFSVX of about +52% in less than two months…
So, what is the point of all of this?
First, that investing in the stock market – with the expectation that you will be able to earn returns in excess of inflation over time – requires to you tolerate a lot of volatility in the short-term. The average annualized return on DFSVX over the 19-year period from January 2000 to December 2018 was about 9.5%. As you saw above, there were months – not years, but months – where the fund rose or fell in price by more than double that. That’s the definition of volatility.
Second, that market-timing is really a folly. Back in March of 2009, all of the economic news was bad. You would be hard-pressed to find any reputable market observer or economist who was publicly urging investors to “buy”. Yet April 2009 represented the best month for stocks in over 75 years. And since that point, notwithstanding a few bumps in the road along the way, the Dow Jones has risen to over 24,000, an increase of nearly 290%.
We will leave you with one final adage, namely that “It’s not about timing the market, but about time in the market”.
The chart below shows all of the bull and bear markets since 1926.
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