Investor Lessons As Bull Market Turns Two

by David Callaway
Wednesday, March 9, 2011

Commentary: History is still a great teacher

SAN FRANCISCO (MarketWatch) — Turns out the Dow Jones Industrial Average didn't go to 3,000. The bank and auto-industry bailouts didn't bankrupt the country. And the investment-banking business on Wall Street didn't collapse like a house of derivatives-marked cards after Lehman Brothers imploded.

On the two-year anniversary of the start of the bull market this week, it's worthwhile for investors to pause and reflect on some of the lessons we've learned since the great financial crisis of 2008 and early 2009.

Back on March 9 two years ago, gloom was overwhelming in the markets. Buy-and-hold investing had been declared dead. With stocks down 50% or 60% in the previous 18 months, and having fallen six months in a row, many investors were convinced the markets wouldn't come back in their lifetimes.

Older retirees and many investors had sold that January or February, at what we know now was precisely the wrong time to get out of the market. The pain of seeing their life's savings depleted in investment statements month after month after month had just become too great.

A relentless stream of triple-digit down days in the market contributed to the soul-destroying talk of unemployment, recession, depression and political chaos in Washington. A new president, who inherited the bailout program from his predecessor, struggled to maintain those policies — which proved correct — while a frustrated nation turned its ire on him.

And then, on a spring Monday of no real significance at the time, stocks bottomed out. Over the next few weeks the market would rise 20% as investors watched and argued about whether it was just another in a long line of false bottoms. It wasn't.

The painfully slow global recovery we've witnessed over the past two years, only now even starting to take hold, had been seen by the collective market at that point, even though nobody understood it at the time. That's the thing about turning points: You never see them coming.

Over the coming 24 months, the Dow Jones Industrial Average and S&P 500 Index would almost double, gold would add hundreds of dollars an ounce to a new record above $1,400 an ounce. And oil, whose massive rally had highlighted most of the decade before the crisis, went into hibernation until just eight weeks ago.

All of this against a backdrop of fear and concern about soaring deficits, the fragility of the world's major banks, Iran's nuclear capabilities and intentions, and the future of the entire European single-currency project.

At the same time, we've become enthralled by the iPad, and Twitter, and all the potential that the mobile revolution brings to how we live our lives — and, in the case of North Africa and the Middle East, how technology can effect social and political change.

The lessons for investors should not be forgotten. Buy-and-hold investment strategies did not survive for decades because they were fads. Investors who didn't sell and held on — indeed, continued to dollar-cost average — did quite well over the last few years.

Diversified portfolios will help capture the best market moves, gold and emerging markets in this case, while hedging against the worst, oil and blue chips during this cycle. And, most important, that the daily noise of news, opinion and protest we all live with, and which grows louder as we increasingly connect ourselves, often needs to be blocked out when making long-term or even short-term financial decisions.

Some people think anniversaries, like stock-market milestones, are just arbitrary dates and numbers that have little significance. But it's worth a moment to look up from our BlackBerrys on this one and think about how far we've come since those gloomy times two years ago. And how far we still have to go.

David Callaway is editor-in-chief of MarketWatch.