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Can you imagine how investors felt if they’d panicked and sold during those bear markets?
They not only made the disastrous mistake of locking in their losses but missed out on those massive gains as the market revived.
“There is simply no precedent, ever in history, of the market staying at a valuation level this low. . . . There are only two potential outcomes: the end of America as we know it or a recovery.
Every time investors have bet on the former, they have lost.”
after bottoming out in March 2009, the S&P 500 shot up by 69.5% in just 12 months. Over 5 years, the index rose 178%, vindicating our belief that bear markets are the ultimate gift for opportunistic investors with a long-term perspective. As I write this, the market has risen 266% since the 2009 low.
he’s still waiting and has missed the entire bull market of the last seven years.
The other client who left Creative Planning during that time was overwhelmed by the barrage of alarmist news in the media. He’d hear a pundit claiming that the market would fall 90%, or the dollar would collapse, or the United States would declare bankruptcy, and these warnings terrified him.
It saddens me to say this, but these two former clients have both suffered permanent financial damage because of rash decisions they made during the bear market.
On average, the market is down about one in every four years.
the market has made money three out of every four years.
Warren Buffett. In October 2008 he wrote an article for the New York Times encouraging people to buy US stocks while they were on sale, even though the financial world was “a mess” and the “headlines will continue to be scary.” He wrote: “Think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets
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try to keep a financial cushion, so you’ll never have to raise cash by selling stocks when the market is crashing.
If you hold a bond to maturity, you’ll receive all of your original loan back, plus the interest payments—unless the bond issuer goes bankrupt.
Real Estate Investment Trusts.
you can own a small slice of a REIT that invests in assets such as apartment buildings, office towers, senior housing facilities, medical offices, or shopping malls.
Master Limited Partnerships. I’m a big fan of MLPs, which are publicly traded partnerships that typically invest in energy infrastructure, including oil and gas pipelines.
MLPs because they pay out a lot of income in a tax-efficient way.
As Warren Buffett said once, “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again, and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
Historically, stocks, bonds, energy commodities, and real estate have outperformed gold. So count me out.
hedge funds are handmade for suckers or for speculators looking to roll the dice on a big bet.
deciding on the right balance of stocks, bonds, and alternatives is the most important investment decision you’ll ever make.
never bet your future on one country or one asset class.
Use Index Funds for the Core of Your Portfolio.
index funds because they give you broad diversification in a low-cost, tax-efficient way, and they beat almost all actively managed funds over the long
view the bear as a friend
The Rule of Seven. Ideally, we like our clients to have seven years of income set aside in income-producing investments such as bonds and MLPs. If stocks crash, we can tap these income-producing assets to meet our clients’ short-term needs.
never underestimate the awesome power of disciplined saving combined with long-term compounding.
Rebalance. I’m a big believer in “rebalancing,” which entails bringing your portfolio back to your original asset allocation on a regular basis—say, once a year.
there’s no need to fear market corrections, and I hope you see now that there’s no need to fear bear markets,
they provide the best opportunity to buy the bargains of a lifetime, so you can leapfrog to a whole new level of wealth. The bear is your gift—one that comes, on average, once every three years!
Just think of my former client who cashed out of the stock market and gambled everything on gold during the last bear market. Fear led him to jettison a carefully constructed plan that would have ensured him a future of total financial freedom.
In every area of life—whether it’s dating, marriage, parenting, the workplace, our health, our fitness, our finances, or anything else—we have a tendency to be our own worst enemy.
the smartest move in a market crash is to buy more stocks while they’re on sale.
financial mistakes can still be catastrophic. Just ask those who lost their homes during the financial crisis,
investors also need simple systems, rules, and procedures to protect us from ourselves.
Black Monday in 1987—an infamous occasion when the market fell 22% in a single day.
80% of success is psychology and 20% is mechanics.
the key question is: “What don’t I know?”
“Where could I be wrong? What am I not seeing? What’s the downside? What am I failing to anticipate? And who else should I speak with to deepen my knowledge?” Questions like these help to protect me from the danger of confirmation bias.
Why Most Investors Buy the Wrong Thing at Exactly the Wrong Moment
One of the most common—and dangerous—investing mistakes is the belief that the current trend will continue.
“The biggest mistake that the small investor makes is to buy when the market is going up on the assumption that the market will go up further—and sell when the market is going down on the assumption that it’s going to go down further.”
Investors tend to arrive just as the party is winding down. They miss out on all of the gains and participate fully in all of the losses.
rebalance your portfolio once a year.
The beauty of rebalancing, says Harry, is that it effectively forces you to “buy low and sell high.”
“overconfidence.” To put it simply, we consistently overestimate our abilities, our knowledge, and our future prospects.
there’s no rational reason on earth to believe you can outperform the market indexes over
invest in a portfolio of low-cost index funds, and then hold them through thick and thin.
by admitting to yourself that you have no special advantage, you give yourself an enormous advantage!
Warren Buffett says, “The stock market is a device for transferring money from the impatient to the patient.”
