Some refer to the 2000’s as “The Lost Decade”. It was a rare ten-year period where the S&P 500 had an average annualized return of about 1.2%. I have a different name for it: “The Best Decade in Memory for Pre-Retirees”, that is, for anybody still adding to their portfolio.
It would have been easy for anybody to become impatient and even disillusioned with investing in companies. In fact, many did. We all know somebody, a friend or family member, with horror stories about investing during this period. But that completely depends on who you talk to.
For anybody still adding to their portfolio, this “horrific decade” turned out to be the chance of a lifetime: company values essentially froze for ten years until 2010, then averaged 15% each year through the end of 2021 (roughly 50% higher annualized returns than average). There were not just one, but TWO chances to buy companies at a significant discount.
The Lost Decade produced two completely opposite outcomes based solely on investor perception. One has horror stories while the other is comfortably sitting on an appreciated portfolio of diversified companies. One sold their ownership in companies during a temporary decline while the other added to their positions. One got scared while the other saw opportunity.
As retirement approaches, it’s advisable to keep a side fund of cash and bonds based on your planned withdrawals. That way, when there is a market pullback, the bonds and cash can be used for withdrawals while we wait for company values to comeback.
In either case, whether you’re retired or still saving, selling because of a market decline is a failed investment policy.
Successful investing can only come from buying low and selling high. However, our instincts tell us to do the opposite: buy when everything is up and sell when everything is down. Humans are simply not wired for investing.
Buying anything, including companies, at a lower price is good, not bad. Selling at a lower price is bad, not good.
This is a simple concept to understand, but not an easy one to execute, and it’s one that I’m always here to help you remember whenever you need it. Your investments should always be based on your financial goals, risk tolerance and investment timeframe and never on what anybody thinks is around the corner in the markets. Please don’t hesitate to contact me with any questions or if I can help in any way.