The Most Important 6 Months Of Your Investing Life

I’m going to make a bold statement that you might initially write off as hyperbole: we’ve just lived through the most important 6-month period you will experience in your investing life.

While it now seems like ancient history, you might remember that stocks went straight down beginning on January’s first trading day in what became the worst start to a year in modern history. But this wasn’t just a bad couple of days; stocks continued to head lower through early February, and parallels were being drawn to 2008 by even«credible» financial media outlets.

Through February 11th of this year, stocks were already down between 10% and 14% on the year. Indeed, we had already experienced 20% to 30% of the losses sustained during the 2007-2009 period, the worst market decline in 80 years! And with conditions seen only worsening (read the Economist article linked above for the full effect), and losses seen continuing, there seemed no point in staying invested. With the memory of 2008 still so fresh in most investors’ minds, and this market heading that way, this seemed like as good a time as any to abandon ship or postpone the funding of a refreshed financial plan. I experienced this mindset first hand with more than one client and several prospective clients.

But the last 6 months aren’t the most important experience of your lifetime because the negative momentum continued. For reasons that no one can fully explain, stocks began to recover exactly six months ago. The table below lists the total returns on broad asset class mutual funds since February 12th:

In just 180 days, stocks around the world have earned 2 to 3 times their average annual long-term historical results. By tuning out the noise, the negativity, the short-term sentiment, you recovered your losses in a short amount of time and are on pace for an above-average year, even beginning from year-end 2015!

The lesson here is not different from what I’ve submitted in previous articles. This time I’m just including a picture with the narrative — an example we can all identify with, an experience that allows us to look critically at our recent decisions and an opportunity to plot a new course for how we will manage our wealth going forward.

Why this has been the most important 6 months of your investing lifetime has little to do with the swift market recovery. It has everything to do with yet another instance where we were told that stocks were poised to collapse. Fear was setting in. Portfolio losses were mounting. The «smart money» had already gotten out. Yet the most profitable move was simply to do nothing — not to give in to the urge to cut and run, to flee for the relative safety of short-term bonds.

In fact, you can see that most stock asset classes returned at least 20% more than bonds in the last 6 months. Looking at this difference spread over a 10-year period, we find that missing just one unexpected burst from stocks over an entire decade can cost you upwards of 2% a year of your wealth! It’s no wonder all of the behavioral studies on investors finds the investment/investor gap typically runs at least this much over reasonable periods — the opportunities to make bad decisions with your money are constantly presented to us. And while we might be able to avoid the vast majority of them, very few can resist them all.

What I want you to remember from this year’s twists and turns, and from the last 6 months in particular, is that stocks most certainly will go down in rapid fashion on a repeated basis over the remainder of your investing lifetime. Sometimes it will be a 10% decline, sometimes 20%, sometimes more. Importantly, every 10% decline will seem, at the time, like it’s the start of something much worse. You will be convinced the next 20% decline is 2008 reincarnate. And you will always have the urge to get out.

With this mindset, I can say with a high degree of confidence you will probably miss some of the additional downturns in the short-run, but you will also miss much more of the unexpected recovery return in the long run. You won’t come out ahead of simply staying invested. The seductiveness of market timing is the idea that we can capture long-term market returns but miss out on just a few of the really bad years. This is fool’s gold. More often than not, you’ll be getting out thinking another 2008 is around the corner, when in reality it’s another 2009.

Most importantly, you won’t feel any better in the long run about side-stepping market declines. Your anxiety when you’re out of the market as it recovers without you, against all odds, will be every bit as bad as the angst you feel watching your wealth erode during temporary downturns. The difference, and it’s a major one, is you can feel relatively certain that the downturns you participate in won’t last forever, but the gains you miss by being out of the market will. You may never get a chance to recoup missed-out-on-returns, as the history of stocks includes frequent and persistent new highs that rarely revisit old levels.

I’m convinced that if you take these last 6 months to heart, learn the lessons that are so clear from the downturn and unexpected recovery, they may shape your investment decisions for many years to come. You might recall this experience, how a full market collapse seemed imminent, and yet how fighting the urge to sell still turned out to be the best move. It might convince you that forecasting and profiting from future market declines on a consistent basis just isn’t going to happen. It might instill in you the belief that «staying the course» with a diversified portfolio is a terrible approach, except that it is better than all of the alternatives. And if any of these things become true, I’m convinced this will be the most important 6 months of your investing lifetime.