Hindsight is 20/20. Or in the case of the stock market, hindsight makes you the smartest investor in the room. It will soon be the 10-year anniversary of when, in early October 2007, the S&P 500 Index hit what was its highest point before losing more than half its value over the next year and a half during the global financial crisis.
Over the coming weeks and months, there will likely be a steady stream of retrospectives on what happened as well as opinions on how the environment today may be similar or different from the period leading up to the crisis. It is difficult to draw useful conclusions based on such observations; we tell ourselves over and over that the past is not representative of the future. But as we look over the last 100 years, financial markets have a habit of behaving unpredictably in the short run but like clockwork going through the full economic cycle over the long-term. An economic cycle includes times of economic growth and economic contraction. There are important lessons that investors might be well-served to remember: Capital markets have rewarded investors over the long term, and having an investment approach you can stick with—especially during tough times—is a great way to prepare you for the next crisis and its aftermath.
In 2008, the stock market dropped in value by almost half. Being a decade removed from the crisis may make it easier to take the past in stride. The eventual rebound and subsequent years of double-digit gains have also likely helped in this regard. Right now, you may not even remember the pain of 2008 (or 2000–2002), because the stock market is soaring, outperforming the other assets classes with bells on. But in 2008, while the events of the crisis were unfolding, the market returns we are seeing now could not be predicted and were anything but certain. Daily papers and CNBC announced– “Worst Crisis Since ’30s, With No End Yet in Sight,” “Markets in Disarray as Lending Locks Up,” and “For Stocks, Worst Single-Day Drop in Two Decades”. Investors were terrified to read the front-page news, open up quarterly statements, or go online to check an account balance.
While being an investor today (or during any period, for that matter) is by no means a worry-free experience, the feelings of panic and dread felt by many during the financial crisis were distinctly severe. Understandably, many investors reacted emotionally to these developments. In the heat of the moment, some decided it was more than they could stomach, so they sold out. On the other hand, those who had an effective plan to manage the risks inherent in all financial markets, and who stuck with that not only survived the crisis, but have gone on to benefit from the subsequent rebound in markets.
We can show you a list of the last hundred “crisis of the day” events and there will be another major event looming that could mean the beginning of the next drop in markets. Predicting future events correctly, or how the market will react to future events, is a difficult exercise. It is important to understand, however, that market volatility is a part of investing. To enjoy the benefit of higher potential returns, investors must be willing to accept some uncertainty in the short run. A key part of a good long-term investment experience is being able to stay with your investment philosophy, even during tough times. A thoughtful, transparent investment approach can help people prepare to face uncertainty and may improve their ability to stick with their plan and ultimately capture the long-term returns of capital markets.
At BCM, we are sticking with a strategy that emphasizes the three things you need for long-term success—a consistent philosophy, a plan to implement that philosophy, and the discipline to see it through to the end. We hope you are with us for the long-term.