The S&P 500 Index dropped 56.8% from October 9, 2007 to March 9, 2009. The global financial system nearly collapsed. World trade halted. The former head of the U.S. Federal Reserve Ben Bernanke recently called September and October 2008 "the worst financial crisis in global history, including the Great Depression."
What started roughly seven years ago wasn't a normal market correction: It was an economic trauma. And while that trauma has been behind us for some time, many of the investors who lived through it can't let it go.
I've been investing for more than thirty years. Granted, I just missed the high-inflation of the 1970s. But I had money in the market on October 19, 1987. Known as "Black Monday," the market dropped 22% in a single day.
I had money in the market during the dotcom crash. And I've had money in the market during the last five recessions -- including the recession triggered by the extraordinary financial crisis of '07 and '08.
In every case, objectivity and caution were friends and fear was an enemy. And one of the worst things fear can do is mask opportunities.
For instance, the money that depression-era people stuffed in books and mattresses generally stayed there. It was never invested nor was it used to improve the quality of the lives that earned it.
Inflation hawks shunned bonds after the 1970s, yet since 1980 bonds (as measured by the Barclays U.S. Bond Aggregate Index) had positive returns in 31 out of 34 years -- a better record than the S&P 500.
Investors who avoided the market since the market crash that ended on March 9, 2009, have missed out on returns of roughly 200%.
Market corrections do occur with some regularity -- and we may be in the midst of one now. But it is unlikely that another market trauma is on our horizon. And it pains me to think that investors are losing sleep wondering if that market crash monster is under their beds.
So I put together my favorite tips on how to stay objective -- regardless of the headlines and market conditions.
- Remember that the experts can be wrong: Experts can be wrong for a long, long time. And business television channels find guests with extreme views just to drum up ratings. So please don't lose a minute of sleep over the ramblings of pundits or television talking heads.
- Maintain a comfortable cash cushion: As investors, we have been made to feel guilty about holding cash. It's as if we're shirking our responsibilities. We feel like we should always have our entire portfolio working for us. But cash does work for us. Cash holds up pretty darn well in a downturn. Cash helps us sleep better at night, no matter what the market throws at us. And cash allows us to buy opportunities during a downturn, without having to liquidate another position.
How much cash you hold is a personal decision based on your financial needs, market conditions and your risk tolerance. But if you wake up during the night worried about your investments, you probably need a little more cash in your portfolio.
- Count your dividends: Positive reinforcement is a valuable tool, especially if the pundits or markets turn negative. Personally, I like to review my dividends and dividend reinvestments. There's nothing more reassuring than to see money coming into your account on a bad market day.
- Reevaluate your holdings: In my newsletter, The Daily Paycheck, my strategy is to buy, hold and reinvest for the long haul. But when global economic or political conditions change, it is always a good idea to assess its potential impact on your holdings. To do this, you must stay objective, which can be difficult when information is limited and panic starts to rear its ugly head. Sell only what you believe has a significant negative outlook -- and leave the rest alone.
- Be careful with your stops: I generally caution against the use of protective stop-losses, especially in thinly traded securities. If you want out of a position or need to raise cash -- go ahead and sell outright. Thinly traded positions can see extreme price movements, especially during volatile markets -- in both directions. And the last thing you want is to get stopped out of a position at a low price, only to watch it rebound at the end of the day or week.
- Keep a shopping list: I don't necessarily advocate "buying on the dip" in general. "Cheap" shouldn't be the sole reason for buying a security. After all, what looks cheap today could be cheaper tomorrow.
But income investors have a special incentive for bargain shopping high-quality securities on dips -- because when prices fall, yields rise. And locking in dependable, above-average income is what it's all about. And it's one reason why I always keep a little extra cash on hand for my Daily Paycheck portfolio.