In early October 2007, the S&P 500 index hit just over 1,500 – an all-time high. You might have been concerned, or you might not have even noticed. Less than 2 years later, the financial crisis occurred and the S&P 500 dropped 50% down to 750 (March 2009). If you were a lump-sum investor, October 2007 would have been the worse month to invest in a rather long time. However, consider this chart via Bloomberg article:
If you held on through the panic, you broke back even some time in mid-2012 if you include dividends (total return). Four years after hitting bottom, you were again hitting an all-time high. After that, basically all of 2013 was spent reaching new “all-time highs” over and over again. You might have gotten nervous again. Is it time for another drop?
Yet, if you continued to hold on until now (October 2017), even if you had the worst possible timing an pushed all your chips in on October 2007, you would have doubled your money. Over the last 10 years, even after both pushing your chips in at an all-time high and experiencing a 50% drop, you would still have earned over a 7% compounded return.
You could interpret this as pro-stocks, but my takeaway is instead that all-time highs don’t mean much. The price could drop by 50%. The price could go up 100%. We’ve seen that, and thus should be prepared for both. Instead of worrying, try considering either possibility and make a plan.
If stocks keep going up from here, I will ______. If stocks drop 50% from here, I will _______.
In my case, my portfolio could be described roughly as 67% stocks and 33% bonds. If all my stocks dropped 50% and my bonds held steady, then I would end up at 50% stocks and 50% bonds. After a 50% haircut, I would be shaken but hopefully remind myself that stock valuations would look a lot better as well. If I can get up the courage, then I will rebalance back to 67/33. If I turn out to be a scaredy-pants, simply staying at 50/50 should still keep me adequately exposed to any recovery.
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Hey John, good morning ! I enjoy your blog and I have read today’s a couple of times. Please double check the fourth sentence and make certain you meant to say October 2017 because I think you may have meant 2007.
Fixed, thanks!
In your the first paragraph did you mean to say that Oct .2007 would have been the worst month to invest, rather than Oct. 2017?
Fixed, thanks!
I love this! On Aug 25, 1987, I was having lunch with a co-worker. (I remember the date because it happened to be my sister’s birthday, and because quickly it was obvious this was a short term top). We were talking about stocks and he asked me what I thought. I didn’t predict the crash, but what I did say was that I had no idea where stock were going in a week or month, but 10 years later, he’d be happy buying today. From 2700, the Dow crashed. But 10 years later? 7860. An 11.2% return even without adding dividends back in. 10 years after that? 13,236, ‘only’ 5.5%, but over 7.5% with dividends and a crash in that cycle as well.
When I look at my own history, a spreadsheet tracking new worth and quarterly totals since the 90’s, any bad year is flanked by high years before and after, more than offsetting the loss and grief.
I took advantage of the 2009 crash by moving my money from one index fund to a different index fund, harvesting a good amount of capital losses. As you said, I made all of my losses back within a short time, but the harvested losses have been lowering my income taxes every year since.
If stocks keep going up from here, I will continue investing. If stocks drop 50% from here, I will harvest my losses for tax purposes, and then continue investing.
Kind of crazy that you wrote about your portfolio allocation now. I’ve been struggling with the knowledge that there will be a market correction at some point in the near future (0-5 years). My current allocation is 64% stocks and 36% bonds. Last week I wanted to go to 60% stocks and 40% bonds as an attempt to time the market but stick to a plan. This week I read https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations and wanted to adjust my allocation to 70% stocks and 30% bonds. After reflecting for a bit I’ve decided that the best thing to do for now is nothing. If the market does drop significantly then at that time I may decide to adjust to 70/30. Otherwise, I’m at the right portfolio allocation for my current risk tolerance.
Chuck, I have learned the key is to look at the current market valuations which we are high now in moving forward over the next 10-20 years. The charts from Vanguard are historic horizons over a 100 year period. These don’t reflect our lifetime nor simulations from our current environment. Just some food for thought, still learning what I realize I don;t know 🙂
I have recently become fascinated with the fact that changing start and end dates even by an inch, or even changing the different assets, can result in starkly different outcomes.
For example, putting 100% in VEU or VWO a decade ago, would have resulted in basically breaking even 7% – 14% after 10 years. BND did 45% during that decade, and as you state SPY/IVV doubled during this period.
If we look at it over the past 15 years however, EFA and EEM ( VEU and VWO not available as ETFs were started later) went on to triple to quintuple your money. Total Bonds barely doubled your money, while US stocks quadrupled your money.
I guess long story short, I am starting to understand the need for broadly diversified asset class exposure of a portfolio.
The future is impossible to predict.
Interesting numbers, thanks for sharing.
I would be scared not investing in stocks. There is no other investment with such a proven track record. Also, blue chip US companies are masters at increasing productivity and profits. If you bet against them over the long term, do so at your own peril.
I’d say real estate has an equally proven track record. Just like individual stocks, individual towns may be bad, but on the whole pretty darn good. Not necessarily passive though
Real estate has a historical return of 3.4% per year. The S&P 500 has a historical return of 7% per year. Which one is a better track record?
What metric are you looking at? That seems extremely low. Are you including rent/implied rents for owners or just looking at appreciation? This doesn’t go back very far, but real estate is higher over the duration looked at: http://www.investopedia.com/ask/answers/060415/what-average-annual-return-typical-long-term-investment-real-estate-sector.asp
Jonathan thanks for the great articles and being so transparent with your portfolio as a learning model. Quick question, if your current holdings are 67% stocks and 33% bonds and if the market declines 50% why wouldn’t your stock portion be 33.5%? Please help me with the math:)
You got it. I know, it does sound off. 🙂 Right now, I have twice as much stocks as bonds. For a $100 portfolio, $67 in stocks and $33 in bonds. If stocks drop in value by half and the bonds stay the same, I’ll have the same amount of stocks and bonds. My $100 portfolio would be smaller, but it would be $33 in stocks and $33 in bonds.
OOps I get it your stock allocation would be the same as your bond holdings. The light bulb went off:)