“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness …” The famous opening line of Charles Dickens’ classic Tale of Two Cities has remained culturally relevant for the past 160 years in many ways — including in the modern world of investing. That passage brilliantly sums up the paradox of today’s financial landscape: Do we live in an era of opportunity, or is it the beginning of the end?
We have enjoyed the current record bull run in the stock market for nearly 11 years uninterrupted. The nightmare of late 2007 to early 2009 seems to fade as the years go by. Recall, however, that in that 18-month span, the S&P 500 lost 57% of its value. Certainly, the market meltdown of 2000-2002 has lost some impact, when the S&P 500 lost 49%. In some ways, the 2000-2002 market decline was more difficult because it rolled out over 32 months. Would there ever be a bottom?
The need to understand the ebbs and flows of the market cycles is crucial to investors. Beyond the numbers, predictions, ratios, technical analysis and opinions of commentators, how we fare in a market downdraft comes down to one thing: ourselves. How investors choose to respond in the event of a market crisis can have significant impacts that last for years.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
To illustrate, the following are two investors I worked with back in 2007-2009 and still work with today. The names and a few details have been changed, but the framework is actual history.
The client who panicked
Joe became my client in mid-2006 when his prior adviser retired. Joe had only begun investing in earnest back in 2002, and his savings had grown to a healthy $750,000. Over the next 18 months, his nest egg increased to nearly $900,000. During our quarterly reviews, I reminded him times had been quite good and that the tide could turn easily — and it did.
By October 2008, his account had fallen back to $750,000, and the drumbeat of bad news from Wall Street became pervasive and debilitating. Joe called me, and despite my plea to be patient and avoid any rash decisions, he moved his entire position to cash. He understandably felt comfortable and secure over the next six months as the market spiraled further downward, bottoming out in March 2009. But here’s the thing: No bell rings to tell us the market has bottomed out. It can take months, even years, of hindsight to clearly understand the market transition points.
Joe spent the next 10 years in a cash position, thinking the market run-up wouldn’t last. If Joe had not panicked and stayed in the balanced allocation that he was in between 2002 and 2008, his $750,000 would have grown to $1.5 million by 2019. Instead, during the extended period of 0% money market funds, his account barely budged.
The client who saw opportunity
Sandy came into my office on March 6, 2009. She felt the market presented an opportunity based upon her experience and “sense” of things. It was a Friday, and it had been some time since someone had stepped up and expressed an optimistic assessment in my office.
Sandy invested $100,000 into the stock market that day. Unknown to us at the time, the most epic bull run in history would begin the following Monday. As a result, Sandy enjoyed a 300%+ increase in the S&P 500 over the next 10 years — and, by my estimate, her investment tripled. Interestingly, she recently redeemed those profits in recognition of all good things eventually coming to an end.
When she looks back on that day, she chalks it up more to luck than anything else. While that is absolutely true in terms of the calendar timing, the courage and optimism she displayed in what was a very dark time cannot be dismissed.
What this means for you
I hope this tale of two investors is beneficial. We are all unique in how we react to events. Dickens’ opening line continues: “It was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us …” The key to navigating declining markets is to understand who we are, and plan accordingly.
If you are more risk-averse or pessimistic, do not apologize for it. Accept it and invest accordingly; there are investment options to assist you without hindering growth prospects. If you are an optimist, no need to apologize either! Recognize it and remind yourself your next opportunity will come — and have some cash ready.
Happy investing!
The opinions expressed those of the author and do not necessarily represent the opinions of CUNA Brokerage Services, Inc. or its management. This article is provided for educational purposes only and should not be relied upon as investment advice.
*Note: Representative is neither a tax adviser nor attorney. For information regarding your specific tax situation, please consult a tax professional. For legal questions, please consult your attorney.
CUNA Mutual Group is the marketing name for CUNA Mutual Holding Company, a mutual insurance holding company, its subsidiaries and affiliates. Corporate headquarters are in Madison, Wis. Insurance and annuity products are issued by CMFG Life Insurance Company and MEMBERS Life Insurance Company, 2000 Heritage Way, Waverly, IA. 50677. Variable Products are underwritten and distributed by CUNA Brokerage Services, Inc., member FINRA/SIPC, a registered broker/dealer and investment adviser.
CBSI-2866820.1-1219-0122
©2019 CUNA Mutual Group
-
Seven Surprising Reasons Retirees Are Going Back to WorkSure, money is a big reason to come out of retirement, but it's not the only reason retirees are doing it.
-
Dow Gains 617 Points as Rate Cuts Near: Stock Market TodayWednesday's economic data didn't shift Wall Street's expectations that the Fed is preparing for a rate cut at next week's meeting.
-
Four Clever and Tax-Efficient Ways to Ditch Concentrated Stock Holdings, From a Financial PlannerHolding too much of one company's stock can put your financial future at risk. Here are four ways you can strategically unwind such positions without triggering a massive tax bill.
-
Beyond Banking: How Credit Unions Serve Their CommunitiesCredit unions differentiate themselves from traditional banks by operating as member-owned financial cooperatives focused on community support and service rather than shareholder profit.
-
Answers to Every Early Retiree's Questions This Year, From a Wealth AdviserFrom how to retire in a crazy market to how much to withdraw and how to spend without feeling guilty, a financial pro shares the advice he's given this year.
-
The Risks of Forced DST-to-UPREIT Conversions, From a Real Estate ExpertSome new Delaware statutory trust offerings are forcing investors into 721 UPREIT conversions at the end of the hold period, raising concerns about loss of control, limited liquidity, opaque valuations and unexpected tax liabilities.
-
I'm a Financial Adviser: You've Built Your Wealth, Now Make Sure Your Family Keeps ItThe Great Wealth Transfer is well underway, yet too many families aren't ready. Here's how to bridge the generation gap that could threaten your legacy.
-
Want to Advance on the Job? Showing Some Courtesy and Appreciation Could HelpTwo business professors share their insights about the impact of digital communication on the social skills of some in Gen Z and the importance of good manners on the job.
-
From Job Loss to Free Agent: A Financial Professional's Transition Playbook (and Pep Talk)The American workforce is in transition, and if you're among those affected, take heart. You have the skills, experience and smarts that companies need.
-
A Financial Planner's Top Five Items to Prioritize When Your Spouse Is IllDuring tough times, it's easy to overlook important financial details, but you'll be so much better off if you take care of these things right now.
