Last Monday morning, I was feeling absolutely sick to my stomach.
The Dow had just opened the day 1,000 points below where it had closed the previous Friday. And this was after it had lost an additional 1,000 points the week prior. The S&P 500 and NASDAQ indexes were suffering from similar losses. All told, the three major U.S. markets were down about 12% in just 4 trading sessions and 18% from the all-time highs earlier in the year.
Personally, I was out tens of thousands of hard-earned dollars. I had just lost multiple years of living expenses in a mere week. I was feeling jittery and nauseous.
What caused this sudden dramatic plunge? GDP growth in China was slowing year-over-year from a torrid 8% to a slightly less, yet still torrid 7%. The result: the millions of new, inexperienced Chinese retail investors that all had piled in to the market were now scrambling to the exits to try to preserve some of their inflated bubble gains of the past year, causing a huge recent decline in the Shanghai Composite index. The slightest negative news had burst the bubble.
It was right then that I had to talk my emotions down…
“You’ve been through this before. Back in 2008, you panicked and sold on the way to the bottom. Now, look where the market is today. China doesn’t matter THIS much – the market is overreacting. If you sell now, just watch, we’ll get a bounceback tomorrow and you’ll have locked in those losses and buying back in at a higher level later on.”
So, I didn’t. And here’s what happened next…
- The Dow recovered 900 points that same day (before dropping 700 points again before close).
- Wednesday saw a 600 point increase – the largest one day increase in years.
- Thursday brought news that U.S. Q2 year-over-year GDP growth had been revised up from 2.3% to 3.7% – the fastest y/y growth seen in over a decade.
- Thursday also saw the latest consumer confidence survey report the highest confidence levels in 8 years.
- Friday saw a calm trading day.
Rationality won over emotion and within the same week, the market had clawed back half of its losses. Had I followed my gut and panic-sold, I would have missed out on those return gains.
Wednesday morning a colleague at work, whom I’d guess was in his mid 20’s, sent me a message of panic:
“Hey, I saw that I lost $3,000 in my 401K the other day. I thought those returns were guaranteed with the 401K match.”
me: “No. 401K matching does not guarantee market returns. Investing returns are never guaranteed.” (I wisely substituted this for: “Is that it? Consider yourself damn lucky, YOU PUNK!”)
him: “Bummer. I am freaking out.”
me: “Don’t panic. You’re young, what happens today won’t matter 50 years from now. Besides, you’re probably still better off than from where you started, right?”
later that day, after a 4% gain…
me: “There you go, look what happened today. And in 50 years, you won’t remember any of this.”
him: “The market taketh, and the market giveth.”
me: “Damn right.”
Now, to be fair, my colleague and I could go on to lose another 10% in the next day, month, or year. Or… we could gain another 10% in those same time frames. The point is – nobody knows.
You. Just. Can’t. Time. The. F’ing. Market.
Without question, the U.S. economy is actually in much better standing now (with the Dow now priced at 16,600) than it was when it was priced at 17,500 a week earlier or even 18,400 earlier in the year. We haven’t seen y/y GDP growth at 3.7% in over a decade and consumers are feeling more confident than they have in a long time. We didn’t know these things before sell-off, but now we do. Yet, we’re 1,000 and 2,000 points off those highs – and the only real discernible reason why is because Chinese investors got greedy and panicked, and then U.S. investors then did the same.
So, what can we take away from these developments? There are many lessons…
- Investors behave irrationally.
- The market is priced irrationally.
- You cannot accurately predict when it will go up and when it will decline. Trying to time the market is a fool’s game.
- When you have the strongest emotional urges to buy and sell are precisely when you should do the opposite.
- The opening on Monday (when panic was at its height), in short-term retrospect, provided an excellent buying opportunity.
All important lessons. But the biggest takeaway is this: What happens in 1 day, 1 week, or 1 month in 2015 will have almost zero impact on where the market will be in 2025 and even less impact on where it will be in 2050. Want further proof of that? Look back over the last 35 years. The market, despite 3 major crashes and dozens of similar 10%+ “corrections”, is up about 1,636% over that time. 1,636%!!! That is the power of compound investment returns.
A panicked investor in 1980 who pulled skin out of the game and bought back in decades later would be absolutely devastated for missing out on those long-term returns.
About the best you, I, or anyone can do is the following:
- Passively invest in low-cost ETF’s and index funds.
- Consistently add to your investment positions over time and re-balance periodically.
- Do not panic sell. Buy when others are selling.
You’ll thank yourself later.
Update: the market has returned to its pre-correction levels, for further proof that market timing doesn’t work.
Related Posts:
Hey GE,
Long time reader, first time post.
Yes, the market was down. But it presented a great opportunity to purchase stock at 12% below what it cost the previous week.
It’s important not to get too sucked in to the day-to-day performance of the market and look at trends over years.
I have auto-invest set up to buy stock on the 1st of the month, I missed out on the opportunity too :(
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” – Warren Buffett
I totally agree. Unfortunately, I was 100% invested, so there were no funds to take advantage!
So question –
I know passive broad investing is the name of the game. I’ve been burned by picking and timing winners and losers for sure.
But in the lead up to this Manic Monday, we all knew on paper the market was generally over-valued and prime for correction. Not even a secret. In that case, is there any merit to holding x% in cash?
I am generally 50-80% invested in the total stock market (ITOT) and certain index funds (e.g. Energy seems undervalued). Against my intuition I did not back off ITOT when the Dow was nearing 18k. Then boom, 10% drop. There is a separate question of “where’s the bottom” but suppose I started 50% invested, would it make sense to buy gradually as prices get cheaper?
Or do we follow the “efficient market” principle and assume today’s price is irrelevant to future activity?
Whatcha think?
“I was out tens of thousands of hard-earned dollars.” Glad you talked yourself down from the ledge. Remember that UNTIL you sell, you have not made or lost a penny!
@Brad–I’d dollar cost average and call it a day.
The market was almost fully recovered by the time my 401 k contribution went through, so the drop didn’t really benefit me. However, it didn’t hurt me either, so I’ll take that.
The market is a bubble created by years of 0% interest rates. The * will hit the fan eventually. Hopefully it’s not when you plan to retire.
https://www.youtube.com/watch?v=4b2UGHHaZRg
It was a great day to fund your Roth IRA. Today may be another such day…
Hey GE,
I love your stuff and I think you have one of the best financial blogs out there.
I’ve got to wonder, if you are contemplating selling when the market plunges around 10%, aren’t you allocated a little too aggressively? Doesn’t it matter that you allocate yourself in such a way that you are able to hold your investments through major downturns?
Also, I can’t help but think, “Yes, the market has increased over 1500% over the last 35 years, but why does that have anything to do with what you will gain over the next 35 years? And how many investors actually realized that gain?” Not too long ago (2010), the “lost decade” was being paraded throughout the media. If you had invested in 1999 and held through 2010, you wouldn’t have made money. What if the market comes back down to ’08 or ’00 highs? We’ll have then gone on for FIFTEEN years without any progress. How great will we feel about investing then? (Of course, as your point 3 states, that would be a great buying opportunity.)
I’m with you that the trajectory of the market is upward over long stretches of time (at least, I hope), but I’m not convinced that passive indexing is really as great as it sounds. It’s easy to pick out statistics that “prove” that indexing works over time, but a lot harder to actually realize returns.
I also love the point about consistently adding to your positions over time. I just think your strategy has to be such that you can continue to add when the market is bringing pain.
I would appreciate any push back. Please keep writing! You’re doing a great service to a ton of people.
Good questions.
I’m still young. Being close to 100% stocks is a risk, but not over multiple decades. That doesn’t mean that it’s easy to stomach when there’s a big dip.
On paper, you’re seeing years of work vanish into the abyss. If you’re not impacted a little by that, you’re a special and rare breed.
Will the market go up another 1,600% over the next 15 years. Who knows? Probably not. But will it go up? Inflation (~2%/yr) + GDP growth (~3%/yr) + dividends (~2%/yr), compounded annually, point towards yes. Besides, where else will you get better returns? Maybe you could beat that if you’re in a depressed real estate market and know what you’re doing. If the market reverts back to 2008 levels, I will take out loans and invest.
Yes – this is why you don’t try to time the market or be smarter than it. You just have to go with the flow as best you can.
Couldn’t agree more. I’ve tried timing the market and I lost a lot of money and sleep. Its better to contribute regular amounts on a regular basis. During dips I increase the frequency.
Hi GE,
Great post. I’d like to share my personal story w/ question. I started my 401k in June 2014 with all of them placed in money market fund provided in my employer’s plan. Then I placed 32% on an index fund tracking S&P 500, 48% on an international index fund and 20% on money market fund starting January 2015 right before Greece referendum. This August, my employer got acquired and the 401k plan’s terminated. I ended up with a 10% lost YTD and had to transfer it into a self-directed IRA plan.
Now I’m thinking: is it really a good time to put it on another index fund with all the volatility in the market and interest raise on the horizon? I understand trying to time the market is totally fool in the long term because there’re too many factors can affect your portfolio and strategy. But one should really try to avoid some obvious macro downward signs/risks in the short term.
I’ve learned over the years to take the long look on everything.particularly stock investments.
Example,my dad bought 600 shares of Exxon (another name back then) on Jan.1951. Same day bought 400 shares of Hershey’s .same day bought 500 shares of GE. I still have them and the best I can tell each of these holdings was selling for around $1.00 back then. The market is down bad now but Exxon is around $75, Hershey’s around $80,GE around $25. Not to mention the 64 years of dividends received. His philosophy, make an investment and leave it alone,get busy doing something else. It takes time. Young people have a hard time with the long look. The sooner they can develop it the better off they will be. Look way down the road! Priceless advice!
Holy crap. That doesn’t include any stock splitting either. I’m really curious, how much is each stake worth now?