Thinking Of Moving To Cash? Read This First
On Black Monday October 19th, 1987 the Dow Jones Industrial Average dropped 508 points, from 2247 to 1739, a drop of 22.6%, in a single day. It was the single largest drop in stock market history, percentage-wise. Basically, what’s taken a year to unfold at present happened in a single day. Sounds bad, right? Anybody in the market for the crash must lost a fortune and never fulling recovered, right? Not true. From January 1987 to December 31 2007, the S&P 500 returned 8.97% per year in capital appreciation alone. If you count reinvested dividends, your return would have been much better than that.
What Happens Today Won’t Seem So Important 20 Years From Now
Black Monday probably seemed like the end of the world to those who had money in the market. Many people panicked and moved to cash and some of them even swore off equities forever for being too risky, just like a lot of people are doing today. But now, 21 years later, the events of Black Monday seem almost inconsequential. Even including that horrible day, returns have been strong since then. 1987 even finished mildly positive for the year despite the carnage. Remember, you are investing for the long term. What matters is your balance 20 or 30 years from now, not your balance next year. Over long periods of time, the stock market has proven itself to be a very safe place to keep your money, even during more dire situations than this one.
Market Timing Doesn’t Work
There are tons of studies and well-crafted articles arguing that market timing doesn’t work for the average investor, so I don’t feel the need to repeat them here. Unless you’re absolutely convinced it really is different this time and the US economy will never recover, you should stay in the market. That’s not to say you shouldn’t diversify abroad, of course, but moving to 100% cash or bonds or precious metals is more likely to backfire than outperform over the long term. Sure, some people can probably out-guess the market. But what are the chances YOU are one of those people?
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Interesting article. I think the actions of the fed are the critical element. I am convinced that the market is going to crash no matter what. But, if the fed stays out, we may have a one day 25% drop and from there we could begin to rebuild the economy. If that was the case, I want to sell now before the crash and then buy back after that day.
But if the fed is going to intervene with bailouts, stopping shorts and lowing interest rates to push more easy money into the credit crisis, then I think the market is going to slowly drop for several years – or it may hold up while the value of stocks becomes worthless because of massive inflation. In that case, I want to get out of the dollar and the US markets completely because my wealth will only decrease year after year.
I would rather have the 25% drop in one day, but the fed is not going to let that happen, and therefore the dollar is going to sink and the US market is going to loose value no matter what companies you own. The fed leaves me no choice but to get our of the dollar and the US market.
I agree with you 100%.
It’s silly to play the market. Now is not the time to stress or panic. 20 years from now, this will seem like something rather insignificant.
I also did the calculations, concerning Black Monday.
Even if you invested heavily the day before the crash, if you had just forgotten about your money, then 20 years later you would have had an average growth of 14% year-on-year (taking the JSE overall index into consideration – I’m South African).
nteresting article and I understand the point you are trying to make. The one thing I would is that not everyone has a long term horizon. For example people who are coming close to retirement age may want to protect what little capital they have left so it would probably make sense for them to switch to a lower risk asset class.
Long term equities perform well but it needs to be a broad based portfolio with few transactions in order to reap the full benefits of time and capital appreciation.
Kyle,
I agree 100% with your conclusions. I especially liked the links about the futility of market timing for average investors.
I remember reading a book by a successful independent futures day trader a long time ago where he mentioned that it took him 19 years before he became profitable. If he had simply bought and held S&P 500 index fund he would have had much better results at the end of the day..
Well, it seems like it WAS a good idea! I would pay thousands of dollars to place my portfolio value back to where it was the 3rd week in Sept. The trouble is … no one knew how bad the fall was going to be…
a 25% drop would have been nice.