It is bad enough that investors lost a lot of money in 2008 during a frightening world financial crisis. The sudden and swift recovery that began in March may be even worse for panicked investors who had barely a day to catch their breath between swings in the market. Now many investors who suffered through the bear and still regret their inability to have sold out before the decline are sitting on the sidelines wondering whether it is safe to commit new money to stocks.
In the meantime U.S. stocks, which fell by a stunning 57 percent from their highs in 2007 (as measured by the Standard & Poor’s 500 Index), have rallied by 50 percent since March 9. The sudden shift in sentiment has left a lot of investor money out of the stock market: nearly $3.5 trillion sat in money market mutual funds at the end of September. Some media financial “experts” are saying the recent rally is merely a head fake and that the bear market will reassert itself in the coming months. Investors regret both their losses from last year and having missed some or all of the 2009 rally.
The best cures for these regrets and uncertainties are a long-term view, an acknowledgment that forecasting is very imperfect, and a balanced investment approach. Market history going back 200 years is clear: large downturns like the 2008 bear have inevitably been followed by extended recoveries. But the history also shows that those recoveries are uneven: there can be declines of weeks, months, even a year or more, within those upturns, obscuring the breadth of the upturn as it is happening and only allowing it to be seen in retrospect.
Anyone who believes that accurate forecasting is possible should look at their own track record. Did they get out of stocks at the high of October 2007? Did they buy in at the low in early March?
The most important realization is that investing should not be an all or nothing game. At all times a rational investor should have a balanced portfolio with some cash, bond, and stock holdings. A balanced allocation will reduce the regret over suffering losses and missing gains, and give an investor confidence to keep investing new money regularly.
