(MoneyWatch) In an ironic juxtaposition, the fourth anniversary of the March 9, 2009 stock market plunge arrives on the heels of an unprecedented stock market high. Not long after that historic plunge, while the pain and anxiety was still at a fever pitch, I penned a piece for Money Magazine called a Bear to Remember. Though it seems inconceivable that any investor who watched their portfolio shrink like an ice cube on a summer sidewalk could forget what it felt like. Yet here we are with stocks at an all-time high, and it's only since January that investors have begun making net inflows into stock funds. So, once again, I'm going to try to evoke some memories of that painful bear in the hopes that maybe I'll be successful in scaring you straight.
Four years ago, stocks were down more than 55 percent as the whole financial sector was in meltdown. The government was making emergency loans to too-big-to-fail banks and insurance companies to save the system from collapse. Financial giants like Lehman Brothers and Merrill Lynch needed to be acquired. GM was on the verge of bankruptcy and the great depression ahead seemed like a sure thing. "Cash is king" was the phrase of choice as so many investors bought the new, and absolutely silly, paradigm that "capitalism was dead."
I'd be lying if I said I wasn't feeling intense pain. The hardest thing I ever had to do was to take my own advice in this video filmed two business days before March 9, 2009. Buying more equities at that time was like being punched in the gut three times and then asking for three more. I know I gladly would have taken those punches to get my losses back.
In the "Bear to Remember" article, my goal was to help investors capture the pain and use it as a teachable moment. No good bear should go wasted. I wanted readers to write down or record a video talking about their feelings and what they would do the next time stocks recovered.
Fear can be a motivator and a good teacher. While I don't know whether stocks will have a 50% plunge or surge, I do know that most investors aren't nearly as afraid as they should be. Running away from stock funds from 2008 to 2012, and only now returning after hitting new highs, illustrates how little investors channel that fear effectively.
So pull out your investment statements between September 2008 and March 2009. Look at how much you lost and try to remember your pain and what it compelled you to do. Did you make any trades? If you sold some of your equities back then and increased your cash, what makes you think you will do anything different next time?
Write down a simple asset allocation policy. "For the next 10 years I will not let my portfolio vary by more than five percentage points from this allocation: Stocks ____%, Bonds ____%, Cash ____%." Then before finalizing, ask yourself whether you would stick with it if the headlines read "Stocks down 70% as economic collapse imminent." Would you have the courage to stick to the plan? Don't kid yourself. It's better to have a conservative policy that you follow than an aggressive policy you won't.
Remember two things. First, the herd is always brave when markets reach new highs. Second, the herd always gets slaughtered.