This week we are celebrating two stock market milestones: March 9th was the six-year anniversary of the 2008-2009 bear market closing low (on 3/9/2009, the Dow Jones Industrial Average was at 6547, its lowest level since April 15, 1997; the S&P 500 was at 676, its lowest level since Sept 12, 1996; and the NASDAQ was at 1268, its lowest level since Oct 9, 2002) and March 10th was the 15 year anniversary of the NASDAQ’s all-time closing high (5,048 on 3/10/2000). What lessons can we draw from these historic turning points? I can think of no better events to learn the lesson of how investor fear and greed can lead you astray. These two powerful emotions often trump any semblance of rational thought and can cost you dearly.
Let’s start with fear, while the financial crisis is fresh in your mind. From the beginning stages of the meltdown in 2008 through the bear market low in the spring 2009 and then for months – even years – later, many investors wanted to sell everything and hide under the bed. That was an understandable feeling-it really was scary!
The big problem with selling when conditions are grim is that very few investors have the wherewithal to get back into the fray. When they do, it is usually long after markets have clawed their way back up. Acting in fear often ends up prompting you to sell low, buy high and take unnecessary overall losses in your portfolio.
The opposite of this scenario was in plain sight by March 2000. By that time, the technology revolution and the dot-com frenzy drove the NASDAQ to nose bleed territory. From 1992 to 2000, the index went from 600 to 5,000, with the leap from 4,000 to 5,000 occurring in just two months! While there were indeed great and breathtaking innovations at the time, investors went berserk and gobbled up any tech company, regardless of its profitability or viability.
Despite racking up a return of 85 percent in 1999, the biggest annual gain for a major market index in U.S. history, investor greed led investors to jump in or just as worrisome, sit atop massive profits, without regard for risk and a potential downside move. When the music stopped, stocks plummeted. By the end of 2000, the NASDAQ was halved and finished its bear-market rout in 2002, down 80 percent.
Market extremes like the heights of the 2000 bubble and the depths of the 2009 wipe out are great reminders that every investor must guard against fear and greed. The easiest way to do so is to maintain a balanced approach that helps keep those emotions in check. Every investor should create and adhere to long-term plan, which incorporates a diversified portfolio that spreads out risk across different asset classes, such as stocks, bonds, cash and commodities. Investors then need to periodically rebalance to insure that neither fear nor greed takes over.
My Dad, who was a stock and options trader for fifty years, used to extol the following three golden rules of investing, which have always been helpful reminders when I was a trader, an investment adviser and then just a plain old long term retirement investor like you. Let's call them "Albie's Big Three":
- Nobody rings a bell at the bottom or the top. To be a successful investor, be patient and have the discipline to stick to your game plan - do not be swayed! That said, if you make a mistake, get out quickly.
- Do not make a major investment decision intra-day. If the idea is a good one, then an extra 24 hours of thought will not hurt and may prevent you from executing a reactive trade that is catalyzed by market movement only.
- Remember that nobody really knows what is going to happen in the short-run, so do not fall prey to either bull market cheerleaders or bear market Cassandra's.