2009 was not a year for investors with weak stomachs. After a plunge of 46% from August,2008 through March, 2009, the U.S. markets started rising, recovering almost all of the losses since last August. The same was true for international stock markets. Unfortunately, many investors I spoke with locked in their losses by selling in late February, and then never got back in and missed the 50% rise from March on.
Lesson 1:
When the markets fall by 40% or more in a year it almost always signals we are near the bottom of the market. The major post-WW2 declines have been about 40% (1974, – 37% in 9 months; 2001-2, -35% in 14 months; 2008-9, -46% in 6 months). So once the market has declined sharply in a short period selling will almost guarantee a big loss.
Lesson 2:
Although the market declines are steep and fast, so are the rebounds (1974-5, +45% in 14 months; 2002-3, +47% in 14 months; 2009,+63% in 6 months). Most people who sell at the bottom are also slow to get back in since they are afraid of future declines and miss out on most of the rapid gain.
Lesson 3:
Younger investors should not be soured on investing. Poor market performance in their younger years could benefit them in the long-term. If you are in your 20s or 30s the markets have not seemed to be a great place to put your money. That is not long-term thinking. Your time horizon is at least another 30 years. The lower prices are now, the more shares you can buy and the more room your have for appreciation.