A year ago, on the first anniversary of the bear market low, which occurred on March 9, 2009, it seemed impossible that we were talking about stocks rising by nearly 60 percent in just one year. Well now we have another year under our belt and the news is GREAT: the S&P 500 has nearly doubled from the bottom!
For all of you perpetual bears, the past two years haven't been kind. In fact, a lot of investors have missed out on this massive rally because they were spooked by a nasty turn of events that occurred last year, just after the first anniversary of the lows.
Expressed as an equation: Greek debt crisis + May Flash Crash = Panic-induced stock selling
Many investors told me that they just couldn't take it anymore. The swings were too wild, the ride to jarring. They would pour all of their money into bonds and live the simple life. (Things didn't work out so great on that front, as many learned that bonds and bond funds can lose value - especially those pesky municipal bonds!)
The freaked out investors sat on the sidelines, only to see Ben Bernanke come to the rescue: the Federal Reserve embarked on a program to buy bonds. "Quantitative Easing 2" or "QE2" didn't really keep interest rates low or prevent house prices from sliding, but it sure did provide a boost to stock prices--cheap money has a way of doing that.
So here we are two years later and stocks are chugging higher. Neither Middle East unrest nor rising oil prices canhalt the forward progress. Some think that corporate earnings and reasonable valuations could give the bull has some more room to run -- for the record, S&P says that since 1932, the average lifespan of a bull market is 3.8 years.
Meanwhile, many other asset classes have surged since the bear market lows in 2009, making stocks seem practically passe. In honor of the traditional second anniversary gift, cotton, (really--you get a t-shirt for your second anniversary?) commodities have roared back and delivered some of the most astounding returns over the past two years.
And not to be too much of a buzz-kill, but US stocks are still about 15 percent below their October, 2007 highs. That's why I always come back to my tried and true advice for navigating all phases of market cycles.
- Don't fall prey to your emotions: it's never as good OR as bad as you think. That means that two years ago, selling because you were panic-stricken was not rational. Nor was it smart to throw in the towel the day after the Flash Crash. That said, please, please don't buy just because stocks have nearly doubled from their worst levels. Guard against fear and greed-they are powerful emotions!
- Create a game plan and take a risk assessment quiz: Many pooh-pooh risk tests and the planning process in general, but I like having a baseline to which every investor can return. Given the ups and downs of the past few years, you're likely to know exactly how you felt about the swings, which makes this the perfect time to do it. Most retirement plans have online risk tests and every advisor, broker or salesman worth his fees, should FORCE you to take one. He/she should then trot out the results when you talk like an idiot at some point in the not-so-distant future and claim to know where the market is going next.
- Invest in a diversified portfolio: Did you know that from 2000-2010, a diversified portfolio of stocks and bonds BEAT a riskier portfolio of 100 percent stocks? And I bet those diversified folks slept better too.
Here's the two-year scorecard:
- S&P 500: +95%
- Dow Jones Industrial Average: +87%
- NASDAQ: +116%
- Russell 2000: +136%
- Copper: +174%
- Silver: +168%
- MSCI emerging markets: +134%
- CRB commodity index: +122%
- WTI Crude Oil: +121%
- S&P GSCI agricultural commodities index: +104%
- MSCI Europe: +95%
- Gold: +55%
- Two Years After the Crash, Have You Learned Your Lesson?
- Safe Investments: Bonds, Gold and Cash?
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