After the stock market decline of 2008, a question asked frequently by Financial Advisors was and continues to be, “What have we learned?”
Interestingly, most investors and financial consultants do not ask the same question after a market rally like the one we had in 2009. All investors need to heed the wisdom of both scenarios. Life provides us many life-learning opportunities, and the stock market decreases from 2008 and the stock market increases from 2009 are no exception.
Many of the same factors that led to severe downturns, such as overreactions to recent news, also powered strong rebounds. While the bear market in 2008 was very painful, the pain did end. We certainly have more obstacles ahead, but the recent recovery is showing signs of sustainability.
When stocks suddenly turned positive amid all the doom and gloom, many investors were probably caught asleep at the wheel. Many had put their money under the mattress and missed a giant rally.
As we look to the lessons learned from an increasing stock market in 2009, consider the following:
Lesson 1 – The stock market heats up when pessimism is the highest. As an example, when the stock market hit a bottom in March of 2009, fear and panic were everywhere. Many people questioned if the economies and
markets would ever rebound. The truth is they did rebound, but no one likes to buy stocks when things have gotten worse.
Lesson 2 – Once you decide to get in the market, don’t wait for a full correction to occur. Most of us are not able to predict these ultimate highs and lows in the market. With the market up, investors may feel more confident about stocks but would like to see them come down a bit before investing. It is very difficult to determine when a correction –defined as a drop of 10% - will come. Remember Lesson 1.
Lesson 3 – It is ok to take gains from your investments. Suppose you have an investment that is below your initial investment but up 15% since the start of a bull market. Taking that 15% gain and putting it in cash or some other conservative investment will help lower the volatility that you may experience but it will not eliminate it. This means that you will still be exposed to the market’s gains (should it continue to rise), but your exposure to a downturn will be less.
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This article was published in the Founders FCU's Open Exchange Newsletter (July 2010). It was written by Keith Benton, Certified Financial Planner with Founders Investment Services Team.