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2008 Market Crash: Would the 7 Investing Principles Have Helped Investors?

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.

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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.

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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 2000-02 and 2008-09 bear markets, by 2018 she had $259,000 more than Ana, because she was in the market longer.

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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.

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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.

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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. At right, 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.

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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.

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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.

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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.

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Important disclosures:

Investing involves risk including loss of principal.

The information provided here is for general informational purposes only and should not be con­sidered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are consid­ered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

Past performance is no guarantee of future results

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower rated securities are subject to greater credit risk, default risk, and liquidity risk.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Indexes are unmanaged, do not incur management fees, cost or expenses, and cannot be invested in directly.

S&P 500® Index is a market-capitalization weighted index that consists of 500 widely traded stocks chosen for market size, liquidity, and industry group representation.

Bloomberg Barclays U.S. Aggregate Bond Index is a market-value-weighted index of taxable investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage backed securities, with maturities of one year or more.

Bloomberg Barclays US Treasury Bills 1-3 Months Index is designed to measure the perfor­mance of public obligations of the U.S. Treasury that have a remaining maturity of greater than or equal to 1 month and less than 3 months.

Russell indices are market-capitalization weighted and subsets of the Russell 3000® Index, which contains the largest 3,000 companies incorporated in the United States and represents approximately 98% of the investable U.S. equity market. The Russell 2000® Index is composed of the 2000 smallest companies in the Russell 3000 Index.

MSCI EAFE® Index (Europe, Australasia, Far East) is a free-float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the US & Canada. The MSCI EAFE Index consists of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. Net of taxes assumes that dividends are reinvested after deduction of withholding tax, applying the rate applicable to non-resident individuals who do not benefit from double taxation treaties.

Citigroup U.S. 3-month Treasury Bill Index is an index that measures monthly total return equiv­alents of yield averages that are not marked to market. The Three-Month Treasury Bill Index consists of the last three three-month Treasury bill issues.

Total Return (TR) indices assume reinvestment of dividends, capital gains, and interest.

Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

The material contained herein is proprietary to Schwab. None of the information constitutes a recommendation by Schwab or a solicitation of an offer to buy or sell any securities. This infor­mation is not intended to be a substitute for specific individual tax, legal or investment planning advice. Where specific advice is necessary or appropriate, please consult a qualified tax advisor, CPA, Financial Planner or Investment Manager. Schwab does not guarantee the suitability or potential value of any particular investment or information source. Certain information present­ed herein may be subject to change.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

©2018 Charles Schwab & Co., Inc. (Member SIPC) All rights reserved.

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