“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.
Sign up for Kiplinger’s Free E-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
-
Ten Cheapest Places to Live in TexasProperty Tax Looking for a cheap place to live in Texas? Look no further. These counties have the lowest property tax bills in the Lone Star State.
-
AI Is Missing the Wisdom of Older Adults: What It Means for YouAI will increasingly affect your healthcare and finances, but young workers are primarily designing the systems and getting most of the jobs.
-
The Three C's to Financial Success: A Financial Planner's Guide to Build WealthConsistency, commitment and confidence in your chosen strategy are more critical to your financial success than finding the 'perfect' financial plan.
-
A Financial Adviser's Guide to Solving Your Retirement Puzzle: Five Key PiecesIf retirement's a puzzle you're struggling with, try answering these five questions. The answers will guide you toward a solution.
-
You're Close to Retirement and Cashed Out: How Do You Get Back In?If you've been scared into an all-cash position, it's wise to consider reinvesting your money in the markets. Here's how a financial planner recommends you can get back in the saddle.
-
After the Disaster: An Expert's Guide to Deciding Whether to Rebuild or RelocateHomeowners hit by disaster must weigh the emotional desire to rebuild against the financial realities of insurance coverage, unexpected costs and future risk.
-
A Financial Expert's Tips for Lending Money to Family and FriendsWhat starts as a lifeline can turn into a minefield if the borrower ghosts the lender. Following these three steps can help you avoid family feuds over funds.
-
What the HECM? Combine It With a QLAC and See What HappensCombining a reverse mortgage known as a HECM with a QLAC (qualifying longevity annuity contract) can provide longevity protection, tax savings and liquidity for unplanned expenses.
-
721 UPREIT DSTs: Real Estate Investing Expert Explores the Hidden RisksPotential investors need to understand the crucial distinction between a REIT's option to buy a Delaware statutory trust's property and its obligation.
-
I'm an Insurance Expert: Yes, You Need Life Insurance Even if the Kids Are Grown and the House Is Paid OffLife insurance isn't about you. It's about providing for loved ones and covering expenses after you're gone. Here are five key reasons to have it.
