The summer has wound down, and unfortunately, I am back from vacation.
To make things interesting, the stock market went down a little for a 3-week stretch in July and August. The Dow was down about 4.5% from its all-time high of 17,138 which it hit on July 16th until it got down to 16,368 on August 7th. The DFA Core Equity fund that is the biggest U.S. stock fund holding in many of our accounts went down about 3.9% during that same timeframe. The S&P 500 and NASDAQ were also down similarly.
Of course, that meant that the articles and news stories came flooding out about how the market was going to crash and how you’d better get out of stocks now, which lead some people to wonder if this time the pundits were correct.
Well this time so far they are not correct. Again. On Thursday afternoon the Dow was at 17,048 which is 90 points or about 1/2 of 1 % from its all-time high and the S&P 500 closed at its all time high. For a slightly broader perspective, consider that all of those indices and the fund I mentioned previously are all up for the last 3 months and the year as of this writing.
The stock market meltdowns of 2000-2001 and 2008-2009 have so scarred so many people that the market going down a few percentage points from its all-time high has more than a few people people worried. Should it?
No, it shouldn’t. History has shown us repeatedly that the market comes back up to reclaim new highs, usually not long after it has gone down. There was a great article in the New York Times this week called Hesitating on the High Board which had some terrific stock market data.
The first part of the article, unrelated to what I want to discuss, showed that if you have a lump sum to invest it is usually better to invest all at once rather than to spread your investments over time. There is nothing new in that, but it is always good to see further evidence of what you think to be true.
The second half of the article makes a pretty compelling case for staying invested through turbulent times. Bernstein Global Research looked at the worst 12-month periods for investing in stocks since 1926 and how long it would have taken an investor to come out whole, had they not sold their stocks.
For those who don’t have time to read it, I am going to quote from the article: “For example, the worst 12-month period since 1926 began on July 1, 1931, during the Depression: The stock index lost 67.6 percent, including dividends, in those 12 months. Yet it would have taken only 39 months – 3.25 years – to erase all your losses, assuming that you had stayed in the market.
In recent decades, Bernstein found, the worst 12-month period began on March 1, 2008, when the market’s return was minus 43.3%. Many people bailed out of stocks then and never went back. But if you had stayed fully invested in the market, you would have recovered all of your losses within 22 months – and would be sitting on enormous gains today.”
To summarize Bernstein’s research, after 2 of the worst 12-month periods ever for investors, it took all of 2-3 years to recover. Yes, those were difficult years and the media pounds it in your head that things are awful. Guess what? All you have to do is resist your urge to bail out and you will come out ahead. The data on that is clear and convincing and has been repeated numerous times. It’s about the only time that life will reward you for doing nothing – besides vacation.