The US market dropped about 5% during the month of August. This caused memories of 2008-2009 to surface. Some investors began to feel anxious and wanted to make decisions about how to protect themselves against losses. People often feel tempted to alter their investment plan in an attempt to avoid loss during market declines. Historical data, however, shows that this strategy tends to backfire.
Fidelity Investments recently conducted a study of actual results of their client portfolios with the view to understand whether attempting to time the market really works. They looked at three sub groups over the period from the fourth quarter of 2008 and the first quarter of 2009, near the bottom of the market downturn, until the first quarter of 2013, which was the market high at the time of the study.
The first group sold all equities in the fourth quarter of 2008 or the first quarter of 2009. This group remained out of the equity markets as of the first quarter 2013. The second group sold all equities in the fourth quarter of 2008 or the first quarter of 2009 and then came back into equities prior to the end of the first quarter of 2013. The third group did not sell any equity holdings and remained invested in equities throughout the period up to the first quarter of 2013.
The results were significant. The first group, who sold their equity holdings and stayed out, saw their investments grow by about 15% over this time period. The second group, who sold their equities and then later reinvested back into equities saw their investments grow by about 50% and the third group, who stayed invested in equities, saw their investments grow by almost 85% over this same time period. Results did vary somewhat based on the total allocation to equities. Higher bond and cash allocations tempered the growth.
We looked back at our articles that appeared in OSCAR during the last quarter of 2008 and the first quarter of 2009. Our essays had a “don’t panic – stick to your plan” strategy throughout this period of dread and panic. Those who followed this advice should have reaped benefits similar to those in the third group of the Fidelity study.
There will be another significant market decline at some point in the future, and it may be sooner than you might expect. When the next significant market setback occurs, and we promise you it will, we encourage you to read our short essays here in OSCAR. We will be recommending the same strategy. Don’t panic, remain calm, and stay invested to suit your objectives and plans. Better yet, if you have the resources, continue to invest. Significant market setbacks have always gone down in history as prudent buying opportunities for the future.
The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail firstname.lastname@example.org. Mutual Funds provided through FundEX Investments Inc.