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Almost three years ago in September of 2008, the capital markets accelerated into a decline in response to an economic event that would later come to be known as the Great Recession. The stock market activity throughout 2008 and into the first quarter of 2009 was a source of severe stress and consternation for investors everywhere.
On April 9th of 2009, the capital markets changed course and began a bull market climb that advanced steadily upward for over two years. The S&P 500 reached a bull market high on April 29th of 2011. As of the market close today, August 4, 2011, the S&P 500 is down almost 12% from the April 29th high.
This recent downturn in the markets and today's extreme sell off begs the question: Is history repeating itself?
Our answer to that question is "No" and "Yes".
History we DON'T expect to repeat this year:
- A Massive 50% Decline in the Stock Markets. The Great Recession was the result of a credit crisis that posed a very real risk of sending the financial markets 80 years back in time. Such extreme risks caused such an extreme decline in the markets. The current market activity is in response to our more "garden variety" economic concerns such as our inability to add (enough) jobs during 24+ months of economic recovery. If we're headed into a recession, we're already likely half way into a more typical 20% - 25% market correction.
History we DO except to repeat this year:
- The inevitable progress pattern of investing: Two Steps Forward and One Step Back. You've probably heard us talk about this before. If you want an investment that never has a down month, your only real option is money markets or Certificates of Deposit. If you have enough money to meet your objectives while only earning 3% per year (more like 1% these days), then you have no reason subject yourself to the headaches of being a stock investor. If you need your money to grow, you need to be willing to accept risks and volatility in an effort to achieve extra returns. The hardest part about accepting these risks is ignoring the short-term noise in the markets while sticking with a discipline designed for long-term success.
- The Right Asset Allocation Can Manage Risk. Did you notice that none of the news stories about the market led with the fact that the Barclay's Aggregate Bond Index is up over 3% this quarter and over 5% for the year? None of the money that you plan to spend in the next ten years should have anything to do with the stock market. Money that you plan to spend 15 years down the road has time to recover. Money you plan to spend in the next five to ten years should be in fixed income investments. If your portfolio is designed correctly, the money you plan to spend soon is growing faster than we expected.
Our message continues to be the same. Nobody likes seeing their investment accounts go down but volatility is an unavoidable part of the investment experience. As humans, we are all pre-wired to make an emotional decision to act in a moment of stress. This is handy characteristic when we come across a bear in the woods but this instinct almost always works against us when it comes to investing.
As long as your portfolio is already designed for your specific situation, we do not need to act on our emotional distress. We just need to acknowledge that short-term noise can be loud but we achieve long-term success by using time tested portfolio design and sticking with our discipline. | 
