For some milestones, you want to break out the champagne. But
the end of the great bear market, which finally occurred five years
ago in March, may be one you'd rather forget. By the time the
market hit bottom on March 9, 2009, Standard & Poor's 500-stock
index had fallen 57% from its 2007 peak, the biggest drop since the
Great Depression. And there was no telling when the free fall would
end. "Dow 5,000? There's a case for it," said a headline in the
Wall Street Journal
on March 9. "Investors throw in the towel," online magazine
proclaimed less than a week before.
Despite the pessimism, though, stocks did turn around--and they
have gone on to stage one of the most powerful rallies in recent
history. From the bottom through the end of 2013, the S&P 500
returned 203%. Looking back, you could glean many lessons from the
stock market's plunge and subsequent recovery. "It's the painful
experiences that are the most valuable," says Jim Stack, who
newsletter. We've identified five take-aways from the bear market
and the years that followed.
Lesson 1: They don't fire a starting gun to mark the arrival
of a new bull market.
Early in 2009, with the S&P 500 down 25% in the year's first
ten weeks, few investors would have guessed that the index would
finish '09 with a 27% gain. Overall, the news was grim. The
unemployment rate was on its way to hitting 10%. Two of the
country's three major automakers, Chrysler and General Motors,
filed for bankruptcy reorganization that spring. Congress passed a
$789 billion stimulus package to try to revive the economy. Based
on the headlines, it didn't look as though things would get better
anytime soon. "There was a belief that the good things that
happened in the past would never happen again," says John
Rekenthaler, vice-president of research at Morningstar.
Stocks, however, did make a comeback, and the mood-defying
reversal was a reminder that trying to call a market's bottom is
something few investors can do.
Lesson 2: Rebalancing is essential.
Big market moves can wreak havoc on the balance of stocks and
bonds in your portfolio. Let's say you had 60% in U.S. stocks (as
measured by the S&P 500) and 40% in bonds (as measured by
Barclay's U.S. Aggregate Bond index) before the bear market started
in October 2007. By the end of the bear market, the ratio would
have flipped to 38% stocks and 62% bonds, just because of changes
in market values. The timing could hardly have been worse because
your portfolio would have been light on stocks just as they were
poised to take off.
Rebalancing--a system of selling and buying investments to
maintain your portfolio's asset allocation--helps you avoid such
unintentional shifts. And it forces you to buy assets that have
grown cheaper and sell ones that are expensive--in other words, to
buy low and sell high, one of the cardinal rules of investing.
On paper, rebalancing looks simple enough. But from an emotional
standpoint, it can be tough to execute. Few people wanted to buy
stocks in March 2009. "Rebalancing goes against our strongest
investing behavior," says Fran Kinniry, a principal at the Vanguard
funds. "We don't want to buy assets that have had negative
Worried you won't have the discipline to rebalance? One solution
is to set a fixed schedule--say, at the start of every year or
after your portfolio mix has shifted by five to ten percentage
points. Another option: Consider a balanced mutual fund, which will
maintain a steady ratio of stocks and bonds for you. Dodge &
Cox Balanced (symbol
) is a solid choice. Over the past five years, Balanced returned an
annualized 17%, nearly as much as the S&P 500's annualized
return of 18% but with less risk.
Lesson 3: Diversification works.
By March 2009, few investments had come through the bear market
unscathed. The crisis that began in the financial sector spread far
and wide, taking nearly everything down with it.
Still, the fall was not uniform. In 2008, the S&P 500 lost
37%, but financial stocks sank 55%. Meanwhile, shares of companies
that make essential consumer goods, such as toilet paper and
cereal, dropped a more tolerable 15%. Merger Fund, a member of
the Kiplinger 25
, lost just 2% by investing in stocks of already announced takeover
targets. And some investments actually made money: Vanguard Total
Bond Market (
) returned 5%, and SPDR Gold Shares (
), an exchange-traded fund that tracks the price of bullion, earned
Diversification can't prevent losses, but it can help slow the
bleeding. And over longer periods, it has added to returns. Fund
sponsor T. Rowe Price found that a simple mix of 60% large-company
U.S. stocks and 40% high-grade U.S. bonds gained an annualized 4.6%
from April 2000 through November 2013. But a portfolio with a
broader mix of investments, including emerging-markets stocks and
high-yield bonds, earned 5.5% annualized.
Lesson 4: Stocks are a portfolio's engine but not the place
for short-term financial needs.
Although stocks have reached new highs recently, that's cold
comfort if you had to pull money out of the market during the crash
to pay the mortgage or send a child to college. In those cases, the
bear market was a painful reminder of the potential downside of
stocks. It also showed that as you think about your portfolio, your
investment timeline has to be front and center.
Mark Luschini, chief investment strategist at brokerage Janney
Montgomery Scott, suggests putting assets you'll need within five
years in low-risk fare, such as money-market funds and short-term
bonds. That way, if stocks tumble, you won't have to sell at the
worst possible time.
But if you have a long-term horizon, stocks are the place to be.
An investor who had $100,000 in an S&P 500 index fund at the
market peak in 2007 would have lost more than half of his portfolio
by March 2009. If he panicked, moved the portfolio to cash and
stayed there for the next five years, the balance would still have
been $50,100 as of the end of November 2013. But if he stayed with
stocks, the portfolio would have not only recouped its losses but
grown to $136,000 by the end of 2013.
To be sure, a 50% loss in 17 months was reason to panic. "But
what helped was having the proper perspective of time," says Erik
Davidson, deputy chief investment officer of Wells Fargo Private
Bank. "In most cases, an investor's timeline is measured in years
or decades, not months."
Lesson 5: Calling a top is just as hard as identifying a
Investors have had plenty of reasons to doubt the current bull
market's staying power. In 2011, a debt-ceiling crisis and
S&P's downgrade of the U.S.'s credit rating helped trigger a
19% drop in the S&P 500. Still, the index eked out a 2% gain
that year. In 2013, the budget standoff in Washington and the
government shutdown looked ominous. But stocks registered a
stunning 32% return.
You are no doubt wondering what will happen next.
predicts another winning year
for stocks. But there are no guarantees. For most of you, the best
course is to build a diversified portfolio geared to your time
horizon and tolerance for risk and to stop worrying about when the
bull will head out to pasture.