People forget things.
The financial crisis really got going ust about seven years ago, when JPMorgan bought Bear Stearns for $US2 per share on March 16, 2008.
A year later, stocks were down about 50%, but since the March 2009 bottom, US stock indexes have roughly tripled, moved back to all-time highs, and made the crisis feel like a long-ago nightmare.
Which leads us to this headline from Time last Thursday, which reads: “When Going All In Is Not A Risky Bet.”
And this headline really captures what the entirety of post-financial crisis thinking comes down to: don’t sell. (The second point is: ‘Just buy the damn index fund.’)
Felder, we’ll note, isn’t a bear per se, but believes that most of the gains investors are currently expecting from stocks over the next 5 or 10 years have been captured in the last 5. In short, Felder thinks returns going forward are going to kind of stink.
Which brings us back to the Time report, which addresses a question from “Rod in Los Angeles,” who is 33, recently received a $US200,000 windfall, and is nervous about putting it all into the stock market at all-time highs.
Here’s the answer, via Time:
Assuming you’re investing this money for the long term — and you have sufficient cash set aside to meet short-term needs and emergencies — go ahead and invest it all at once, says Jerry Miccolis, founding principal of Giralda Advisors, a Madison, N.J. firm that specialises in risk management. “Don’t let headlines about the market hitting new highs make your nervous because, if the market does what it’s supposed to do, that should be the norm,” says Miccolis.
Time picks back up:
Consider this analysis from wealth management tech company CircleBlack: An investor who put $US1,000 in the Standard & Poor’s 500 index of U.S. stocks at the beginning of 2008 (when stocks fell 37%) and again in early 2009 would have been back in positive territory by the end of 2009.
A critical caveat: This advice assumes that you actually keep your savings invested, and not panic sell when things look ugly.
The problem, of course, is that like most dogmas that permeate financial markets, this advice is entirely backward-looking. The past is all we have to go on when looking for clues about the future of markets. We can guess at future economic trends, what a company might earn, acquisitions it might make and so on, but like ultimately the metaphysics win out here: we’ll never know for sure.
But what we do know for sure is what happened in the past; and then what happened after that.
For example, we know that the housing market started topping out in about 2006. We know that it took another 18 months for the major problems this caused to start showing up in the financial sector, and it was another year after that before the stock market bottomed.
And along the way, it seemed for a bit like the world was going to end.
In 2015, however, we can all sort of sit back with clear heads and say, “You know, if you’d just stuck it out, you’d be fine!”
Easy to say now.
When I threw out the idea on Twitter that what we’ve sort of learned, in a not-that-helpful group-think sort of way, from the financial crisis is that if you don’t sell, you’ll be fine.
And folks quickly noted that there are number of problems with this claim. Of course there.
There is the “don’t buy” crowd. And of course there’s the reality that many violent market moves happen inside of a circular framework, meaning that the selling begets selling and so on: clients watch TV, see stocks are down, redeem their shares in a mutual fund, which causes the fund manager to sell out of positions faster than they’d planned, and so on.
This happens thousands of times around the financial universe and all of a sudden you’ve got a full-on crash on your hands.
Which brings us back to the idea that if you just “don’t sell” you’ll be fine.
From time to time we note that stocks usually go up. This has been true over the last 150 or so years in US markets, which on its own seems to put a pretty solid foundation under the idea that in the future, stocks will also be higher. But who can really know.
Stocks might go higher from here but they also might go lower. The real problem is in having unshakable conviction that one of these things will happen.
On Monday we highlighted comments from a recent speech given by Stanley Druckenmiller, who said he got rich “being a pig.” Julia La Roche has the breakdown on what that means here.
But in that same speech Druckenmiller also said that, “I’ve thought a lot of things when I’m managing money with great, great conviction, and a lot of times I’m wrong. And when you’re betting the ranch and the circumstances change, you have to change, and that’s how I’ve always managed money.”
And so the lesson is that successful investing requires flexibility and the recognition that an all-in bet, of any size, in any asset is always a risky bet.
And when any “clear” or “obvious” lesson starts to emerge from a period of financial distress, we’ve probably started to forget whatever the actual lessons are.
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