In Search of A Silver Lining
To put it mildly, things were not going well. After dropping 27% in September-October, the market had fallen an additional 22% by November 20, closing below its lows of the 2000-2002 bear market. Gloom and doom were everywhere.
My plan, fine-tuned at the beginning of the year, called for a 40% allocation to fixed income and 60% to stocks. The fixed income portion was doing worse than expected, primarily due to the shocking results from Schwab YieldPlus (which I sold and redeployed into another fixed-income fund). And my stock funds, due to the extreme market weakness across all asset classes, were likewise tanking.
At age 63, I've been through my share of recessions and bear markets before, so I knew exactly what to do. Did I . . .
- Double up on my blood pressure medicine?
- Take a poll of my savvy investment adviser friends?
- Quickly sell everything in my retirement portfolio?
- Put on a stiff upper lip and follow my long-term plan?
While there was a lot to be said for option A, I resolutely chose option D. I know you're counting on me to practice what I preach and set a good example in times of turmoil and distress.
So, no, I didn't pull money out of stocks. I continued to engage in "inside-out thinking." This approach makes decisions based on one's financial needs and a personalized long-term strategy designed to meet those needs. Your buy/sell decisions are made based on what's required to make sure your financial holdings are in accord with the game plan, not on emotional whims. Thus, short-term market volatility, so-called expert opinions, and economic forecasts are largely irrelevant to inside-out investors.
Of course, having a plan is one thing; following it is another. If recent events have you doubting the wisdom of remaining invested in stocks in the face of the current recession, perhaps a little history will help.
The table below illustrates a market truism: stock prices reflect future expectations, not current realities. Among other things, this means that stock prices tend to hit bottom when a recession is about one-half over.
The table looks at the 14 recessions since 1926. If you had bought large-company stocks at the midpoint of every recession and held them for 18 months, your average gain would have been 29.6%. If you had invested in small-company stocks, you would have done even better — gains of 39.6%. Surprisingly, investing in the midst of a recession has, far more often than not, led to outstanding stock market profits.
The current recession is now believed to have started in December 2007. A recent survey of 50+ economists by the Wall Street Journal showed an average expectation that it would last until mid-2009. If so, that would make it the longest recession since the 1930s. Notorious bear Nouriel Roubini, who was on record predicting much of the current meltdown, believes the recession will last all the way through 2009.
Under either scenario, the halfway point of this recession appears to be behind us. In other words, usually this has been a time to buy, not a time to sell. These days I take my silver linings where I can find them. 
- SMI Editorials page
- To Panic, or Not to Panic, That Is the Question
- When Good Upgrading Portfolios Go Bad
- The Bear Is Back! Are You Prepared?
- Don't Let a Discouraging Market Cause You to Forget What You Have Learned from Experience
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