This Time is Different
By Adam Baley
Perhaps a bit shell-shocked from the historic stock market downturn in 2008, some investors have expressed dismay at recent market performance.
A nationwide poll reported in the August issue of Money magazine shows respondents saying stock market volatility prompted them to get out of stock investments either somewhat (12%) or entirely (19%).
One obvious similarity between the decline then and now is that the stock market sold off in 2008 and the stock market has sold off so far in 2010. The similarities, however, stop there.
The selloff we have seen in the first half of 2010 is not the same as in 2008. The most profound difference is that bonds have made money. Back in 2008, both stocks and bonds declined together – a scenario occurring only a handful of times in more than 100 years of market history.
Through the first half of 2010, the S&P 500 index of stocks lost roughly 8% of its value – the bulk of the losses happening in May and June, the last two months of the second quarter. But before the decline, the S&P 500 had climbed about 75% from its low point in March 2009.
A selloff after a widespread rally is to be expected. Stocks often need a moment to catch their breath after months of sprinting. Taking a breather allows equities to consolidate before rallying into the next leg of a recovery.
The big difference between 2008 and now is that this year bonds have performed differently than stocks.
Generally, the value of corporate bond funds is up roughly 3.5% in the first half of 2010 – more than that if you reinvested interest from the funds.
As opposed to 2008, 2010 has returned to a more normal correlation between stocks and bonds. They are now ebbing and flowing separately. The continued strength of bonds throughout the more recent stock declines has signaled that liquidity has come back. Investors needing to convert bond investments to cash can find fairer market prices than in 2008.
This year has been a reminder that prudent balance and diversification are key to long-term investment success and easing short-term pain. Sheltering some of your assets from the day-to-day volatility of the stock market can help ease your emotions and smooth out your portfolio’s ups and downs.
The markets will always ebb and flow, but you have the ability to use its movements intelligently to build wealth over a lifetime.
Adam Baley is an investment advisor at Landaas & Company.
initially posted July 29, 2010 (updated April 13, 2015)