The circumstances around the next major stock-market decline will be different, of course, but human psychology will no doubt be similar to what drove many investors in 2008 and early 2009 to act against their own long-term interests.
Three money managers have shared the stories of how they and their clients navigated a dangerous financial environment and the lessons all investors can learn from history.
All three managers emphasized the importance of maintaining discipline through a crisis and, rather than running away from the market, staying in and even taking advantage of price declines to improve your portfolio to take better advantage of the inevitable recovery.
Here are four charts:
Chart 1: S&P 500 and DJI performed as the subprime-mortgage bubble burst, from the end of 2007 through the bottom on March 9, 2009, with dividends reinvested:
Chart 2: Indexes’ total returns from the end of 2007 through the end of 2011:
Chart 3: The total returns from end of 2007 through March 6, 2019
Chart 4: Total returns from the bottom on March 9, 2009 through March 6, 2019:
Here is the conclusion we can draw upon:
- The worst of the decline began in September 2008, which is when Lehman Brothers went bankrupt, Washington Mutual failed (with the wreckage purchased from the FDIC by J.P. Morgan Chase JPM, and Merrill Lynch was acquired by Bank of America BAC, +0.35% Then President George W. Bush signed the Troubled Asset Relief Program, or TARP (otherwise known as the bank bailout), on Oct. 3, 2008, as in Chart 1.
- In early May 2011, the indexes were close to returning to the break-even point, before pulling back, as in Chart 2.
- From the peak, end of 2007 to March 6, 2019, the return is 139% fro S&P and 93.55% for DJIA, as in Chart 3.
- A spectacular return of over 400% for the S&P 500 from the bottom through March 6, 2019, as in Chart 4.
MarketWatch, Philip Van Doorn, 2019-03-09, “The Best Strategy to Recover from a Stock-Market Bottom is one you already know“