The Stock Market - One Year after Armageddon

One year ago today, March 9, 2009, the S&P 500 closed a fraction above 676 points. Gary Schilling looked like a financial Nostradamus when he predicted the S&P 500 would close the year at 600, and my favorite radio guru told everybody, including his mom, to get out of the stock market. Even Mad Money's Cramer boasted about telling people to get out of the stock market. Armageddon was clearly upon us as capitalism was declared dead and buried with the great depression ahead. As a practicing planner, I was among the walking wounded, and I suspect the pain I was feeling was not all that well disguised.

Who knew during those "duck and cover" days that one year later the S&P 500 would close at 1,138 points, up an astonishing 68 percent, or 72 percent counting dividends. Much more importantly, U.S. stocks went up 76 percent as measured by the MSCI US Broad Market total return, while international stocks, measured by the FTSE All World Ex US total return, racked up an 88 percent return. Hope has indeed come back, along with the optimism of the market gurus.

Why remember the pain?
I've been fairly criticized for bringing up bad memories before, but strongly believe that No Good Bear Market Should Go Wasted. My argument is that remembering the pain is the greatest hope we have for learning in the future. To better illustrate what I'm talking about, take a peek at this video below that was filmed a couple of trading days before the stock market bottomed out.

I'm not trying to do an "I told you so," as I'll freely admit that what was going through my head as the video was being filmed was "I sure hope I'm right." With every column I wrote reminding investors that Bear Markets Suck, But Don't Give Into the Pain, and Stocks Are On Sale! Why Are So Few Buying, I didn't have a clue that markets would rebound in the fierce manner they did.

Lessons Learned
In reflecting back, using the comfort of hindsight of course, I arrived at some lessons that might help us out the next time Armageddon or Prosperity show up at the door.

1. We are not the risk takers we think we are. We are, in fact, fair weather friends when it comes to risk. In good times, we think we can take risk. In bad times we become riskaphobics.
2. Like heat seeking missiles, we gravitate toward whatever has performed well, and quickly dump what hasn't like a sack of cats. It's the age old dynamic of buying high and selling low.
3. We have the ability to suspend all common sense. Bordering on the delusional, we can convince ourselves of just about anything, whether it's that real estate will never go down or that capitalism is dead. And as silly as these always seem in hindsight, it doesn't stop us from embracing the next flavor-of-the-month paradigm.
4. We will buy advice from anyone. The same institutions that we bailed out from taking too much financial risk still sell us financial advice and manage our money.
5. We have short memories. Already the pain from a year ago has faded and we are repeating the same mistakes.

How are you likely to do in the next market plunge? Since there will be one, the quiz tomorrow is an unscientific, thought provoking attempt at assessing your likelihood of surviving the next plunge. Hint, much depends on how you've behaved in the good times since Armageddon.

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