It’s been two years since the Great Recession hit rock bottom. On March 9, 2009, the Dow Jones Industrial Average closed at 6,547.05, and the S&P 500 closed at 676.53.
Having reached their all-time highs on October 9, 2007 (the Dow at 14,164.53 and the S&P 500 at 1,565.15), bottoming out represented a 54% drop for the Dow and a 57% drop for the S&P 500.
On March 8, 2011, the Dow closed at 12,214.38, and the S&P 500 closed at 1,321.82.
What lessons can we learn as individual retirement investors?
(1) The market is volatile, and there are events that the world’s brightest economists cannot predict with any degree of certainty. But over the long history of the New York Stock Exchange and other US and global markets, the long-term trend has been upward movement. For retirement investing, a long-term outlook is the best strategy.
(2) Dollar Cost Averaging is a good idea. Contributing a set amount of money to your retirement account on a regular basis reduces the effect volatility has on your long-term investments. People who followed dollar cost averaging were most likely hurt less by the drop than people who tried to time the market.
(3) If you got out of the market after losing money, then re-entered the market when it had improved, you bought high and sold low then bought high again. Though it’s human instinct to behave this way, it’s not good for your investment returns.
(4) Knowing your risk tolerance, and investing according to your personal risk tolerance, is very important. How well do you handle risk and losses? If the answer is ‘not very well,’ then don’t get greedy and reach for aggressive, riskier funds when the markets are up. Your risk tolerance doesn’t change with the market; risk-averse people just develop bull market amnesia, forgetting how the bear market felt.
People become emotional and irrational when money is involved – understandably, as account balances can determine when we retire and what we do in retirement. To avoid allowing emotion to rule your financial decisions, your greatest ally is a strong long-term investing strategy, with a basis in reason, that will allow you to remain invested through the downs and the ups of the market.
Carolyn Humpherson, Financial Communication Specialist
Smart401k is a web-based investment advisory service providing unbiased recommendations to help people invest in employer-sponsored retirement plans. Smart401k provides service to nearly 11,000 clients who collectively have more than $2 billion in assets. Plan participants receive personalized, fund-specific investment recommendations and the support of professional investment advisers available to discuss all investment questions. Based in Overland Park, KS, Smart401k is online at Smart401k.com.