Five Brutal Years Teach Investors to Sit Tight

Photograph by Spencer Platt/Getty Images

Five short, mostly brutal, years ago, Henry Blodget made what I think is the best call of his career. In a candid series for Slate, the former stock analyst ragged on the Wall Street marketing and fee machine that he once cogged, urging readers to “invest in a low-cost equity index fund for 50 years. Yes, it’s not a get-rich-quick scheme, and there is fine print: This performance is not guaranteed. You must reinvest all dividends. You must make the investment in a tax-free account. Inflation will maul you. But no investment strategy is more likely to make you rich than this combination of low costs, equity returns, and time.”

I was thinking about Blodget’s advice last week, when the Standard & Poor’s 500-stock index visited levels it hadn’t reached since the end of 2007. Mind you, the milestone has few investors out there walking on sunshine. The market, after all, is still shy of its October 2007 high, which is only a nominal peak when you consider it was pretty much at the same spot at the turn of the century, when the Cult of Equity was actively indoctrinating millions.

But this is only a one-dimensional read. In reality, those who stayed sober, diversified, and total-return minded (and bothered to remember their brokerage log-ins) should be feeling ecstatic. Indeed, many had reason to celebrate three years ago. Thing is, ecstasy—like panic—does not often visit this cohort.

To understand why, consider this exercise: I had Morningstar run a sample $10,000 invested on Dec. 31, 2007, and never since rebalanced, 60 percent in the SPY and 40 percent in the AGG, to represent the most commonly advised stock-bond combo. While the broader market went on to have its single worst year in 2008, en route to the worst decade since the Depression, those who stuck with this simple, do-it-yourself, no-financial-adviser-needed formula were back above water just a year and change after equities set their generational low. By the end of 2011, the original $10,000 was worth close to $12,000.

According to research from Vanguard published in March 2011, despite the ravages of 2008–09, defined-contribution plan—i.e., 401(k)—savings continued to grow for most participants from 2005 through 2010, with the latter year’s account balances hitting their highest levels since 1999. The study “found that participants’ tendency to take no action on their plan accounts seems to have had a beneficial effect, in that participants did not overreact to market volatility during this period.” (Since the report was released, the S&P 500 has returned another 18 percent.) It all underscores Vanguard founder Jack Bogle’s exhortation: “Don’t just do something. Sit there.”

Indeed, on that total-return basis, including reinvested dividends, the S&P 500 set new all-time highs last year. As Josh Brown, the tweet-happy “Reformed Broker,” succinctly put it: “And Then We Erased 2008.” The hardened Long Islander offered rare, tender handholding: “At a certain point,” he wrote, “it’s okay to stop licking one’s wounds and reliving the horrors of the past—while retaining the lessons learned and the wisdom hard-earned through experience. Move on, the markets have.” (Here are Brown’s lessons from 2012.)

“Getting wound up by a crisis is the worst thing investors could do,” says Morningstar’s Russ Kinnel. “You end up selling low, and if you waited for positive signs at a certain level you either bought high or not at all. Markets rebounded rapidly, well before the economy started to show signs of recovery.”

And so my mind is transported back to all the relatives and co-workers who approached me when the market was in its free-fall, swearing it off for good. That this was different, young man, very different.

What’s sadder: That they missed out? Or still have yet to realize it?