It’s not easy being rational.
When your 401(k) drops several thousand dollars in a few months, when the people on your TV are chattering about another recession, when newspapers lead with headlines a fiscal cliff (whatever that is) putting corporate investment on hold…it takes a great deal of resolve to sit there and do nothing.
But as an investor, much of the time, that’s exactly what you need to do.
Recently I’ve been having flashbacks to the beginning of the Great Recession four years ago. The airwaves were filled with stories of stunned investors reeling from having lost 30 or 40 percent of their life savings.
It’s hard to fathom losing that much money and watching dreams disappear with the blip of a stock chart.
But what’s more tragic, still, is that many of those same investors turned around and sold the stock they had left.
As you know, it’s nearly impossible to earn a decent return on your money these days. The best savings accounts and CDs yield less than 1 percent while treasuries and other bonds can’t do a whole lot better. So those hard-hit investors who cashed out at the bottom would be lucky to have earned a 2 percent annual return since early 2009.
But consider this: in February 2009, I bought shares of SPY, an exchange-traded fund that tracks the S&P 500. Since then, the S&P 500 is up about 81 percent.
This is an extreme example using a lucky stock purchase near the market’s bottom in March 2009. Although I invested then because I try to buy more stock during markets declines, I didn’t try to “time” the market’s bottom (nor do I advocate that anyone attempt it).
But if those investors who sold their beat-up portfolios in 2008 and 2009 had remained in the market, they just might have recovered much of their wealth. Would some of them still have to put off their goals? Probably. But at least they’d still have a shot at reaching them.
Right now, there is a lot of pessimistic news as the world waits to see how Washington will handle the approaching fiscal cliff. Indeed, our country needs to tackle its own fiscal problems; the United States has too much debt and not enough income. How our lawmakers handle the problem will send ripples through the economy and the stock market. WhyBut we can’t control that. So this month’s sour grapes are no different than the many before it. And my advice is the same: Just ignore it. Well-diversified investors who stick this out will come out just fine, whatever happens.
It’s a time to be rational. It’s a time to wait and see. Not that anyone said it would be easy.