Stock Market Timing: Important Lessons I Learned from the 2008 Crash
- Mark Fonville, CFP®
- Mar 15, 2020
- 5 min read
Updated: Nov 1, 2023
The bull market's over and we are now in bear country as of March of 2020. The last time markets fell like this was during the 2008 financial crisis. If you had money invested during that time, you may remember the emotional toll of the experience. I certainly do.
Get your Retirement Checklist of over 30 things that you need to think about for your retirement. At the time, I worked for an investment management firm in San Jose, CA where I consulted some of the nation's top financial advisors on investment strategy and the academic science of investing.
When the 2008 crash happened, I was shocked when even the most tenured financial advisors started calling me, fearful about what to do next. In droves, they began to question the wisdom of staying invested for the long-term.
Behind the scenes, statements like: "If we get out now, we can avoid more losses" and "This time it's different. I just know it" became repetitious from the "experts" clients trusted.
Eventually, the stress took its toll. A handful of financial advisors I had advised to stay invested sold out of stocks, exactly at the worst time when fear was plentiful. As a result, they damaged their client's wealth beyond repair. Years later, these advisors expressed deep regret for their mistake.
Although my training and education provided the answers, I still wish I could have been more convincing that markets work and that discipline and time are the most prudent cures for a market pullback. I learned many lessons from that experience in the battles of a bear market. Two of those lessons are as follows:
Don't time the stock market.
Stick with your investment plan.
1. Don't Time the Market
Of the thousands of financial advisors I've met, I've never met a single one who could accurately time when to get in and out of the market at the right time. But, I've met many who told their clients they could. History tells us that the best days in the market most often occur AFTER the worst days. Unfortunately, investors who get out of the market often end up missing the best days because they are too fearful to get back in until it's too late. In the chart below, an investor would have reduced their gains by 35% over a 25 year period if they had missed the 5 best days in the market vs. simply staying invested (green bar) and not trying to time the market in the first place.
Source and Disclosure: Clearnomics
2. Stick With Your Investment Plan
When it comes to choosing what to do with your money, sometimes the best thing is nothing. Of course, that's not easy. Doing nothing is hard when it comes to many things in life from NASCAR racing (driving through the smoke of a crash) to raising children (by letting them figure things out on their own rather than intervening). One famous study published in the New York Times in 2008 looked at the behavioral aspects of doing nothing when it comes to sports. In the study, professional soccer goalies were researched to see if the odds of blocking a penalty kick from the opposing team by positioning left, right, or in middle part of the goal. As it turns out, goalies have a much higher statistical success rate (33.3%) of blocking the ball if they just stand in the middle and don’t position left or right. Goalies know this. Yet, they only remain in the center 6.3% of the time. When asked why they dive even when they know the statistics, a common answer is: “I just had to do something”. Successful investing is no different. Stock market history tells us that remaining invested during times of crisis is the best option for investors with well-diversified portfolios. Yet, you may still have the urge to "do something" like pull the plug. Don't - Assuming you have the right portfolio in the first place. The graphic below illustrates $1,000,000 invested in 60% stocks and 40% bonds over 25 years from 1995 to 2020. To simulate an individual in retirement, we also included annual distributions of 4% of the portfolio value starting in the first year, increasing by inflation thereafter. Notice that the value of the portfolio actually increased long-term even with three bear markets (market crashes).
Source and Disclosure: Portfolio Analytics
The World Health Organization officially declared COVID-19 a pandemic, and the “fear contagion” is spreading faster than the virus itself. Between the fear, containment efforts, and knock-on effects on consumer demand and business spending, the economic impact of the coronavirus may be far-reaching. Could the outbreak trigger a recession? It's very possible. We don't know what the next weeks and months will bring. But we do know that the fundamentals don’t change. Reaping the rewards of long-term investing means taking the good days along with the bad. Market bottoms don’t come with a signpost. There’s no one waving a flag saying, “the worst is over, come on back!" The end of a bear market looks an awful lot like the middle, and investors who miss out on the ride back up tend to lose significantly. That’s because the best days and worst market days tend to cluster. Sit the bear market out, and you’re likely to miss out on the whole play. We don’t know how long this bear market will last, and there is no guarantee of the future. But, we do know that panicking and blowing up a carefully crafted strategy is the worst thing to do right now. My team and I are monitoring portfolios, updating financial plans, and remain available for advice as conditions dictate.
In the meantime, I’d like you to remember just three things:
Bear markets are part of the stock investing landscape and we have to live through them to see the next bull market.
You can’t enjoy the upside of the roller coaster if you get off at the bottom.
Make sure you have a plan that's based on historical evidence and your retirement goals, not emotion.
If you need a pep talk or to discuss your investment strategy and financial plan, please reach out by phone to (888) 320-7400 or just reply to this email. We're here for you and are happy to talk.
Mark Fonville, CFP®
Mark has over 18 years of experience helping individuals and families invest and plan for retirement. He is a CERTIFIED FINANCIAL PLANNER™ and President of Covenant Wealth Advisors.
*Sources and disclosures: Clearnomics, Portfolio Analytics
Disclosures: Covenant Wealth Advisors is a registered investment advisor. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions.
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