In September 2008, the collapse of investment bank Lehman Brothers ushered in the worst market period of the Great Recession. From September 2008 through February 2009, the S&P 500 index dropped by more than 40 percent, and many investors saw the value of their portfolios dramatically decline.
While ups and downs in the markets are par for the course, bear markets are particularly unnerving for investors. The following charts explore how investors who followed Schwab’s 7 Investing Principles would have fared during the 2008 bear market and afterward.
In 2018, Schwab polled Americans on whether their financial planning habits had changed during the 10 years since the 2008 market crash. Among people with a written financial plan (“planners”), the vast majority (71%) said they had less debt now compared to 10 years ago. Most said they were saving and investing more and had started working with a financial professional. Fewer than half of Americans without a written financial plan (“non-planners”) said the same.
Also, 62% of planners said they felt prepared for another recession similar to the Great Recession, compared with 31% of non-planners.*
*Source: Schwab 2018 Modern Wealth Index.
Don’t try to time the markets—it’s nearly impossible. Time in the market is far more important. Maria and Ana each invested $2,083 per month for 10 years (for a total of $250,000): Maria from 1998-2008, and Ana from 2008-2018. Although Maria’s investments lost value during the 2000-2002 and 2008-2009 bear markets, by 2018 she had $259,000 more than Ana, because she was in the market longer.
A diversified portfolio can help smooth out the bumps of investing. For example, $100,000 invested in S&P 500 Index stocks in 1997 would have increased to $400,000 by the end of 2017. However, the investor would have had to weather two bear markets, in 2000-02 and in 2008-09. Defensive assets, such as cash and bonds, fared much better than stocks during those market downturns. A balanced allocation that includes these assets can help buffer the effects of market volatility.
Fees can eat away at your returns. If Maria had paid no fees from 1998-2018, her portfolio would have been worth $772,604. However, if she had paid 75 basis points (or 0.75%) per year in fees, her ending portfolio value would have been $689,205. A 0.75% annual fee would have cost Maria $83,399.
Allocating a portion of your portfolio to defensive investments, including bonds and cash, can help buffer the effects of market volatility. This is particularly important for investors—such as retirees—who are relying on portfolio withdrawals. In the chart above, a hypothetical investor withdrew $4,000 each year between 2007 and 2017 from two different portfolios—one invested in 95% stocks/5% cash and the other in 60% stocks/40% bonds and cash. While the portfolio values at the end of the period were similar, the ride was a lot less bumpy with the 60%/40% portfolio.
Over time, a portfolio can drift from its target allocation. This hypothetical portfolio was 60% stocks and 40% bonds in March 2009, but without rebalancing would have been 83% stocks and 17% bonds by June 2018. Not rebalancing can expose a portfolio to a level of risk that may increase its vulnerability during a market downturn, and is likely to be inconsistent with the investor’s risk tolerance.
Bad news can rattle investors. Historically, average investor return has lagged average fund return. That’s partly because individual investors are more likely to panic and sell when the market is down, and to delay re-entry until a recovery is well underway. In most cases, investors are better off ignoring the noise and focusing on their long-term investing plans.
The 2008-2009 bear market was the kind of market event the average investor can neither prevent nor predict. However, following a disciplined approach, such as that reflected in the 7 Investing Principles, may help buffer some of the impact on your portfolio.