The U.S. stock market saw unprecedented volatility and uncertainty during the financial crisis. Those traits have continued and have tested investors’ ability to stick to their investment strategies. Many let emotions rule their decisions and their portfolios have suffered as a result.
From July 2008 through early March of 2009, the bottom of the market, the S&P 500 fell -46.5%. Over this time period investors’ net flows from U.S. equity mutual funds were negative. There were more investors pulling money out then putting money into equity funds. From the March 2009 bottom, the market rose 74.8% through October of 2011. Over this time period net flows to equity mutual funds stayed negative. Not only had investors withdrawn funds as the market declined, but they kept reducing their investment during the rebound. Thus, while the markets rose back to their July 2008 level by October of this year, the majority of investors experienced the fall, but did not keep their money invested to experience the rebound.
We can see a more recent example over the past four months. Over the course of the third quarter the S&P 500 fell 13.9% for the worst quarter since the financial crisis. Over the quarter investors pulled $82.9 billion out of equity funds. The investors who moved out of equities over this time then likely missed one of the best percentage gains ever for U.S equities. The S&P 500 rebounded in October and gained 10.9%.
If investors let fear dominate their decisions they can often be left out of the party when the market rebounds. However, by sticking to a disciplined investment strategy investors can experience the long term benefits of stock market investing.
Index Performance October YTD
US Stock (Russell 3000) +11.51% +0.47%
Foreign Stock (FTSE AW ex US) +10.62% -7.76%
Total US Bond Mkt. (BarCap Aggregate) +0.11% +6.76%
Short US Gov. Bonds (BarCap Gov 1-5 Yr) +0.10% +2.88%
Municipal Bonds (BarCap 1-10yr Muni) -0.45% +5.21%
Cash (ML 3Month T-Bill) +0.00% +0.10%