So. Scared yet?
The market has been rough over the past couple of weeks. One could be forgiven for freaking out a little bit.
I’ve talked before about what to do during a market correction. We’ve officially seen corrections (a movement of 10% or more in a stock, bond, commodity, or index) in both the S&P 500 and the Dow Jones Industrial Average (DJIA) as of February 8th, 2018.
This is the first correction we’ve seen since November 2015-February 2016, when the S&P 500 dropped 13% over 3 months. The recovery from that correction took 4 months – not so bad, right?
I’m starting to see a lot of posts on social media about this drop and what people are doing about it. I haven’t even paid too much attention but I’ve already seen three people say they moved 50% or more of their investments into extremely conservative assets. They have already gotten scared and acted on impulse.
I’ve said before and will repeat infinite times in the future – markets go up, markets go down. This is normal. It is also normal for it to go up, and up, and up over time. The charts above are showing the S&P 500 and DJIA over the last year…here’s what they look like since 1978.
Up, up, up…see?
Investing in a Downturn
But I know that for newer investors, this isn’t normal. If you’ve only been investing for the last two years, you haven’t seen more than a few days of negative returns in a row before. And if you started investing after early 2009, you’ve probably finished every year with a positive return, assuming you were in broad-based index funds. Some years were obviously better than others, but both the S&P 500 and the DJIA had positive returns* every year since 2009.
Given that very long period of overall positive returns, it’s natural that some people get nervous when the numbers go in the opposite direction. Investing is easy and fun when your ending balance keeps going up, up, up! It’s a lot harder when the numbers go down.
So today I’m going to do something a little different. Normally on Fridays I give a little lesson about how something in the financial world works. I’m going to incorporate some of that here, but I’m also going to do something I haven’t done before. I’m going to show you my real, no sh*t, actual account balances for several years through and after the Great Recession. I’m not talking hypothetical numbers today. I’m going to prove to you that continuing investing during a market downturn will end positively if you do it right.
And by right I don’t mean you should follow what I did exactly. I mean you should think through a plan that works for you, while calm and not anxious about the market, and then stick with that plan (assuming it’s a good one). Making changes when panicked because the market has already gone down is rarely a good idea.
The Great Recession
First though, a very quick lesson.
The Great Recession was a major economic downturn that began in December 2007 and lasted until June 2009 in the US. In some countries it lasted until 2012. The Great Recession was caused by the financial crisis of 2007-2008. That started with the housing market, not the stock market, and had wide-ranging effects that went far beyond market investors. “It was bad” is a massive understatement.
Recessions aren’t the same thing as stock market crashes. Recessions are characterized as either reduced economic activity or the contraction of a business cycle. They are often accompanied by rising unemployment, reduced trade, and falling prices. Stock market corrections and crashes are just related to stock market prices and don’t necessarily align with economic downturns, although they certainly can.
The most recent stock market correction began in October 2007. By March 2009, the S&P 500 had dropped 57%. The 2007 downturn started when the S&P 500 had just finally recovered from the 2000-2002 Dot Com bubble burst. In contrast, the S&P 500 reached and exceeded its October 2007 high by March 2013. Everything we’ve seen since 2013 has been a series of constant new highs. The other major indices followed similar though not identical paths.
Let me reinforce that. If you think the last year was outstanding, that it was the best possible result…it wasn’t. It was a great return for the market, but it wasn’t even the best since 2009. You see, the time after a stock market crash often (but not always) has abnormally large returns. It was no different over the last 9 years.
That’s important because everybody who got out of the market during the recession has missed out on some or all of these enormous gains. And I know a few of these people. The 15%-30% returns that *feel* normal right now? They missed out on that.
My Investing Summary 2007-2013
Since I started investing in 2007 and it took until 2013 to fully recover from the 2007 crash, that’s the timeframe I’m going to show you.
Sorry voyeurs, I’m not showing you my full net worth for those years nor am I showing you my current numbers 😉 Those things aren’t relevant to this conversation.
In 2005, I was still fairly fresh out of college and intensely focused on paying off debt. However, I’d learned a lot in college when I started learning about personal finance. One lesson I learned was that time in the market was very important – the sooner you start investing, the longer you have for compounding to grow your money. Because of that, I didn’t wait until I was 100% debt free before I started investing. I opened my Roth IRA in 2007 and paid the last of my debt (credit cards, student loans, and a car loan) in early 2008.
Another thing I learned was that individual investors can’t predict the market and shouldn’t try. I’m so, so glad I learned that lesson early on. It really helped me grit my teeth when the Great Recession hit.
I don’t have all of my statements going back to my very first stock purchase, so I can’t show you everything. But I can show you what my TSP account looked like dating back to 2008. I can show you what my Roth IRA looked like dating back to 2007 (roughly) and 2010 (details). And I can tell you what my personal records say I had.
Some things you’ll notice:
- My spreadsheet might not exactly match the numbers on my statements if I recorded them on a different day than the company reported them.
- If something is highlighted yellow, that means that at some point the information was lost so I had to approximate it. It’s close enough.
- If a block is blank, it just means I didn’t check it. This usually is related to…
- I used to check my investment balances multiple times each month. I now only do a thorough check once each year. It’s better for my mental health. I will occasionally pop in to my accounts to make a change and see the amount for one or two accounts, but not everything.
- But 2013 was the year when I really changed a lot about my finances, so I started tracking it more closely for a few months. You can see why my focus changed here and see the purpose behind closely tracking it here.
- It’s more difficult than you might think to get historical data on the stock market. Not because the information isn’t out there, but because much of it conflicts with each other. Therefore, I tried to standardize my source for return data. For the S&P 500, I used this page. And for the DJIA, I used this page. It’s not perfect information, but at least you can follow along with me. If you want to talk about why different websites report different information, well, that’s a long story for another time.
Investing in 2007
According to my records, I started investing in January 2007. Yes, this means I didn’t have a ton of skin in the game when the market started falling later that year. On the other hand, this was a time when my money in the market represented half of my total net worth. It definitely wasn’t fun when I started seeing it go down!
What does this show? First, you can see that my initial deposits into my individual stock account weren’t immediately used to make a purchase. I deposited $150 before I actually bought anything. And clearly, that thing I bought immediately went down in value. D’oh!
You can also see exactly what happened when the crash started in October 2007. In 2007, the Roth IRA contribution limit was $4000/year. I was depositing $333/month (at the time it wouldn’t allow me to do $333.33 so I had to round down).
I set up my account to deposit the money on the 1st, and I think the actual purchases were set up to happen on the 7th of each month. If you look at the balances on/about the 1st of each month and divide by how many months it’s been, you can tell whether I am “up” or “down” in my investments. For instance, in February I had contributed $666 dollars and had a $684.80 balance. That means I made $18.40 in my first two months. Woohoo!
Of course, if you then look at the November balance you see how hard the October drop hit me. If I’d been depositing $333/month for 11 months, I would’ve had $3663 in the account if I’d earned 0%. Instead, my balance was $3463. I was down $200. Whomp whomp whomp.
The December 16th entry is also interesting. I ended the year with almost exactly the amount I’d contributed. So even with the stock market going down, I didn’t really lose any money.
2007 investing result/lessons? This investing thing is not too bad.
Investing in 2008
In 2008, I both started funding my Thrift Savings Plan (TSP) (this is the federal government employee equivalent to a 401k) and stopped putting money into individual stocks for awhile. So what does this spreadsheet show us?
First of all, I clearly put a lump sum into the Roth IRA between February and May 2008. I’m not really sure why I did that. If I had to guess, I hadn’t updated my contributions to account for the new limit ($5000 in 2008) and so I was playing catch up. You can also see just how bad the market was doing. I started with about $4000 and I know I maxed out that year. If I’d had money in a savings account and I started with $4000 and deposited $5000, I’d have ended with about $9000. Instead I ended with $5633. Ouch.
I’ll let the next graphic and description explain what happened with the TSP.
My individual stock account took the worst beating. What this shows us is the risk of investing in individual stocks. Don’t get me wrong – these stocks have ended up doing well over the years. I’ve kept them the whole time so I can confirm that. But owning individual stocks means you need to be prepared for – and willing to deal with – a wild ride. Using index funds kind of smooths things out. An individual stock might have one year where it goes down 50%, and then the next year it’s up 38%, then down 27%, then up 43%.
My TSP results aren’t actually that bad when you think about it. My end result is 83% of my contributions (17% loss) in a year when the S&P 500 fell 37% and the DJIA fell 32%. Why? Because I didn’t have that money in the market the whole year. I was buying as the prices were falling, so my returns were much better than people who had their full amount in TSP by January (carryover balance and annual contributions deposited in a lump sum).
If you want to see how the media was talking about investing in 2008, check these out:
- CNN Money: Wall Street’s Red October
- The Wall Street Journal: Year-End Review of Markets and Finance
- Entrepreneur: Year in Review 2008: Top Business Headlines
2008 investing result/lessons? Take deep breaths and hold the line. If you can find extra money, put it in the market (I nearly doubled my TSP contributions mid-year when I promoted to a new rank). Buy investments when they are “on sale” but don’t try to time the market because you won’t get it correct. Just keep investing.
Investing in 2009
Okay, so I said that the S&P 500 dropped a total of 57% from October 2007 to March 2009, right? So now let’s look at what my investments showed as we climbed out of the crash.
The Roth IRA contribution limit in 2009 was $5000 again, so between a starting balance of $5861 and an addition of $5000, I’d be looking at ending with $10,861 if I earned/lost nothing, right? Instead, I ended with over $14,000! Why? Because the market started returning some pretty juicy numbers as we climbed out of the recession. I know it didn’t necessarily feel like we (the US) were doing well at the time, but the stock market was.
The TSP is discussed below. For the individual stocks, you can see how they started to recover. The big jump in the stocks column in December is due to a large deposit at the end of the year – not earnings.
You can see just how well investments were performing in that bottom line – my 2009 TSP performance was nearly 30%! I actually did better than the S&P 500 (26.5%) and DJIA (22.5%) returns that year. Does that mean I was chasing returns? NO! It means I got lucky.
You can also see that I increased my contributions again. Why? Well, I knew the market would go back up. It always does. I didn’t know how long it would take, but I knew I was buying stocks for less then than they would be once the market recovered, so I looked for money wherever I could. Putting lots of money into investments is good whenever you can, but if you can find extra money during a downturn, that’s even better.
2009 investing result/lessons? Shovel as much money as you can into the market while the prices are low. It will recover eventually, so you are just buying stocks “on sale.”
Investing in 2010
The Roth IRA and TSP will be discussed below.
In 2010 I also started funding a taxable account, even though I wasn’t maxing out all of my retirement account options yet. I did this because I didn’t know all of the ways to pull money out of retirement accounts early without penalty. I don’t know if, knowing what I know now, I’d do it again. Tax-wise, it’s not as smart…probably. It will depend on how long term capital gains work out. I also started adding small amounts back to the individual stocks account, as you can see.
2010 wasn’t quite as good as 2009 for overall returns, but it was still pretty substantial if you are looking at it in comparison to the historical averages. The S&P 500 returned about 15% in 2010, while the DJIA returned about 13%.
If you are a visual learner, check out that bar chart on the right. You can see the steady rise until late 2008, then the dip during the sharpest drop in the market, then the rise again. But it mostly keeps going up, right? That’s because, when I didn’t have too much in the market in the first place, my contributions were far outweighing the falling market.
Why do I bring that up? Because inexperienced investors, those that haven’t been through the ups and downs in a market, are probably the ones saying “I’ll stop buying for now and just put money back in again when the market goes back up.” You are in the best possible position – you don’t have much to lose and tons to gain. You would be missing out on low prices if you did that!
And don’t tell yourself you’ll wait until we hit the bottom of the market and then buy, either. You won’t identify the bottom. Trust me.
Not much to say about the TSP that I didn’t say about the Roth IRA. Except – see how my 2010 investment performance is a bit higher than what I said the S&P 500 and DJIA returns were? That’s several years in a row! Well, don’t get excited. That doesn’t last.
2010 investing result/lessons? Contributions…contributions…contributions.
Investing in 2011
Warning: 2011-2012 was a very busy time for me, so the spreadsheets don’t show much. During this time I went through some intense training, and deployed for a year, and bought two – count them two – houses, and moved a total of four times. In two years! I wasn’t paying much attention to my spreadsheets, to be sure.
I mean…see? 😂
I’m just going to talk about both of these together.
Roth IRA return: -3.85%. TSP return: -1.03%.
Now compare that to the S&P 500 return that year (2.11%) and the DJIA return (8.21%). Now like I said earlier, the sources I’m using for those numbers aren’t definitive. For instance, if you look at this article you’ll see they report the S&P 500 return as -0.04%, and the DJIA as 5.5%. Either way, I didn’t do as well.
Why am I telling you this? Because I want to get across three points.
- While I may have done well in previous years, it doesn’t take much for that to go away. I didn’t change anything in 2011 that would cause me to get wildly different returns. Markets go up, and markets go down. And sometimes they stay almost exactly the same.
- While it may look like my previous returns, which were significantly higher than the S&P 500 and DJIA returns, were based on my amazing investing prowess, that wasn’t true. Back then, my allocation wasn’t invested to match those indices (I am closer to them now, though still not exact). The investments I was in did an okay job meeting their objectives, which is all I can ask.
- Be careful comparing your returns to others, whether that means other people or reports of returns. All that really matters is that your investments are meeting your needs, which should be based on your long term goals and reasonable expectations. It’s not reasonable to expect that you will always beat the market.
2011 investing result/lessons? Sometimes the market does nothing exciting, either positively or negatively. Keep investing.
Investing in 2012
Again…I was busy this year.
And the market keeps rising. Nothing much to say here. Keep investing broadly, and the market will take care of you over the long term.
2012 investing result/lessons? Again, not much. It was a good year for returns, don’t get me wrong. But frankly the market had been doing so well up to this point that there’s nothing remarkable about it.
Investing in 2013
This is what I meant about checking my balances more often in 2013. You can also see between the beginning and ending balances that this was a very good year return-wise. The S&P 500 return was over 32% and the DJIA was over 29%.
I don’t have a handy dandy chart for the Roth IRA because this is what I saw for 2013… 🙄
Why? Who knows?
But you can tell it must’ve been good. The starting balance was around $36,000 (I don’t have the January 1st amount) and the contribution limit was $5500 in 2013. Together, that’s $41,500. That means I had something like $11,000 in earnings that year!
TSP shows a similar story with high earnings. Although, I actually think I could’ve done significantly better. Back in 2013, I was still using the L Funds for the bulk of my TSP allocation. In 2013, even the most aggressive L Fund (the L2050) significantly underperformed the C and S Funds. Why? Because the L Funds all have a G and F Fund component to them, and those funds performed terribly in that otherwise incredibly profitable year. So while I did better than the L Fund alone (because I wasn’t entirely in that fund), I didn’t do as well as I could have.
And you know what? That’s okay!!
2013 investing result/lessons? Sometimes you won’t earn absolutely incredible returns, but that doesn’t mean you won’t do well.
Hopefully this long and picture-filled post shows you that markets with scary returns, and those with incredibly boring returns, don’t mean you are losing money. If you stick with it, your account balance will go up over time. It just…does. Pick a good plan, avoid news about the stock market, and have faith in the system. Capiche?
Okay, fess up. Who is worried about the stock market?
Gentle Reminder: I am not a financial advisor. I have never been a financial advisor. I will probably never be a financial advisor. I like talking about money. You should probably talk about your money with a financial advisor before taking advice from someone on the internet.