“Should I get out of the stock market?”
It’s a question that I get, not so much from my clients, as from other people whom I have conversations with. Maybe it comes up that I’m a financial advisor, or they’ve known that I’m a financial planner for a while, and they ask, “Should I get out of the stock market?”
When People Want to Get Out of the Stock Market
And this particularly happens when the market is going back down. We’ve had a choppy year here in 2022, where it went down to the first half of the year, seemed to be coming back, and now is going down again at the end of Quarter 3 for a new all-time low for the year.
The question comes up again with people, should they be getting out of the stock market? They read headlines that the market has further to go, or this analyst, this expert, this person who has been investing for 70 years says that the market will be down 50 to 70% before it bottoms out. And there’s more to lose, there’s more to go down, and the worst is yet to come.
So, people ask, “When should I get out of the market?” “Is this the time to sit back and wait, you know, not so much cutting our losses, but wait until the market is down further? And then get back in? Right?” And that’s when people ask this question.
It’s when there are strong fears of recession, or after the market has already gone down substantially. And they think or believe or wonder if it could go down further if there’s a big risk of the market going down even further than it already has. And should we be getting out of the market and waiting for the worst to be over before getting back in? What happens if it keeps going? What if the worst is yet to come? We want to be wise to avoid further losses. Can we win by not losing?
The Fourth Horseman: Panic
Let’s be clear about what we’re talking about here. There’s a concept that we are talking about and people will never say it that way themselves. And the concept is this “panic.” People are panicking out of the market.
That’s what happens when the market is going down as sharply as it has. People are panicking. They’re pulling out for fear that will go down even further. And that’s one of the Four Horsemen that we talked about a lot. It’s the Fourth Horseman: Panic.
But nobody ever couches that way, especially when they talk about themselves. They don’t say, “Hey, should I panic out of the market right now?” “Hey, I’m feeling panicky, should I go ahead and assuage my short-term fears by getting out of the market, so I don’t have to continue to lose money? I don’t want to lose any more money. So should we get out?”
That is what we’re talking about. Panic. I’m a big fan of labeling things what they actually are, because I think a lot of times when we just say things out loud, it gives us a better perspective on it. It helps us see our blind spots, helps us see it from the outside.
The question shouldn’t be, “Should I get out of the market?”
The question should be, “Should I panic out of the market?”
Especially when it’s already down. We are not talking about market timing, which is the Third Horseman and can be equally as dangerous. Market timing is trying to get out before it goes down. The markets are at an all-time high, and people think, “Hey, how much better can it really get? Let’s get out before it goes back down. Let’s take our gains at the top.” That doesn’t work either. We’re talking about getting out now after it has already gone down a substantial amount.
We’re in the official bear market territory. People are wondering if we’re in another recession. But people are wondering, should I get out of the market? And I want to just give you a perspective on it. Because I think perspective always helps to shape our beliefs. And our beliefs, of course, are what we act upon. We never act upon what we know, we always act upon what we believe. But sometimes knowing some things can help shape our beliefs. And so, I want to ask you a question.
Would You Want to Triple your Money in 15 Years?
Would you want to triple your money in 15 years? If you could have invested 15 years ago, knowing that, as of today, your money would have tripled, would that be something that you would want to do? A good investment should double every 10 years. What if you could triple it in 15?
And it turns out, that’s what would have happened if you’d invested at the beginning of the fourth quarter, 15 years ago.
On October 1, 2007, the market opened at 1,527. It just closed last quarter, September 30, 20, 15 years later, at 3,585. The price of the S&P 500 is up two and a half times since 15 years ago.
And in case you missed it, I said October 2007. And September and October of 2007 were the peak before we had the Great Recession. It was right before we saw the S&P 500 lose 57% of its value from peak to bottom.
So, if you had invested 15 years ago, then you would have invested at the worst possible time: right at the peak. You put a bunch of money in the stock market right at the peak before the worst crash we’ve seen since the Great Depression. They called it the Great Recession. This will be an event that’s talked about for decades, and possibly centuries. And you would have invested at the worst possible time.
And yet, 15 years later, just the price of the S&P 500 is up two and a half times to the bottom (as of today) of a bear market in 2022. You’re investing at the top at the peak right before the greatest recession we’ve seen in 100 years. And then you’re measuring from the peak of that, to what might be the bottom of a bear market in 2022. We are not talking about measuring from the bottom of a bear market to a new peak to a new all-time high. We’re talking about a previous peak to a new low. And that price is still two and a half times higher than it was 15 years ago.
Dividends: The Forgotten Ace in the Sleeve
But here’s the ace in the sleeve that we always forget about. Price is what we focus on because that’s what’s always reported right now. “The Dow Jones industrial average lost three points yesterday” and “the S&P 500 was down 5%.”But there’s always this forgotten element when we think about investing, and that is the dividends that the best businesses in the world pay.
Because here’s the thing, people can panic out of the market, because interest rates are going up because there’s a war somewhere else or whatever else. And they can panic out of their ownership in the best businesses in the world. But doesn’t keep those businesses from being profitable. They don’t actually care who’s buying and selling their stock, they’re just trying to be the best that they can be. And they’ll still make profits. Not always, but a lot of them will still make profits, even during these times. And they’ll still pay those profits in dividends.
And if you had taken those dividends across all those times, especially over the last 15 years that we’re talking about, and you had reinvested those dividends, you have a lot more than just the price increase.
The price return is up 147%, or two and a half times the original amount from October 1 of 2007 to September 30 of 2022. But if you had reinvested all those dividends, the total return, the dividends reinvested plus the price return, which continues to compound on each other over time, would be up 231%, or 3.3 times the original amount.
If you’d invested $1,000, back 15 years ago, on October 1 of 2007, it would now be worth 3300. Today, if you put a million dollars in the market on the worst possible day, right before the Great Recession, 15 years later, at the bottom of another bear market, you would still have $3.3 million.
The point is, things will look bleak, day to day, quarter to quarter. That’s why we don’t care about quarterly reports around here. I teach my clients this, saying, “I’m going to send quarterly reports to you partly because legally, I have to, partly because we obviously want to be transparent.”
I send the same message every time we send out quarterly reports to my clients. “You don’t have to look at these. I have to send them, but you don’t have to look at them. We’re long-term investors, we’re owners of the best business in the world. And if looking at these is causing you anxiety and causing you to want to abandon our long-term plan, then just don’t do it. Check them annually at most.” Because we don’t care what happens in the quarter.
You could have invested at the worst possible time and measured against what is now the lowest that we’ve seen so far this year, and you still would have made out like a bandit. You would have just crushed it over the last 15 years.
15 Years of Catastrophes
And that’s 15 years of catastrophe after catastrophe! That’s starting with the Great Recession, and you’re immediately seeing a 57% reduction in your value. So if you’d invested $1,000,000 fifteen years ago, you would have seen a million dollars turned into $430,000. You would have lost $570,000 in value in 18 months. And to think that you could have gotten from that to $3.3 million at a low 15 years later. And when it recovers, you’ll get whatever that’s going to be.
This 15-year period would have started out with the Great Recession. And then you’d had multiple contentious elections in there with both sides warring and at each other’s throats the whole time. And wars with Russia and other wars throughout that time. We faced a global pandemic that we’d never seen before. And lastly, a new recession, inflation, and frantic bear market here in 2022.
You would have gone through all of that in that 15 years, and you still would have been up three and a third over what you had at the beginning if you had just stayed the course. If you had not gotten out of the market, if you never panicked out of the market, and if you just stayed the course, you would have had triple and more of what you started with.
There is a risk if you stay in the market right now. his is coming out on October 6, and I’m not sure when you’re listening or watching or reading this. But if you stay in the market, there’s a risk that the market will go down even further. But we need to look at what’s the greater risk.
The Greater Risk
So let me ask you this, which is the greater risk when the market is already down 20%?
Is the greater risk staying in the market for it to go down another 20%? Again, you should be invested properly and not need that money and have other money set aside. That’s our whole red bucket, blue bucket model. If you don’t know what I’m talking about, you must be new to the podcast and videos. We talk a lot about that book and throughout time. So you shouldn’t need any of this money anyways, right?
But what’s the greater risk? Staying in the market before the next 20% decline, or getting out of the market before its next 200% advance?
The market is up 230, from 15 years ago, which is a 3.3 times multiplier on what you would have invested. And so I contend that the greater risk is not staying in the market for a 20% decline. It’s been out of the market during the next 200% advance.
And that’s a risk you just can’t take. Because if you’re out of the market for the next 200% advance, you will never recover from that. You will never be able to go back and invest in the S&P 500 at 1,527 where it was in October of 2007 right before the Great Recession. If you could, you would, even knowing everything that was happening if that was your only opportunity to buy it in the 1,500s.
Someday we’re going to look back and say, “Wait, you could have gotten into the stock market in the 3,000s. When S&P 500 was 3,600 or 3,700? You could have done that, and you didn’t?!”
You’re going to wish you had bought in or stayed in when the S&P 500 was only 3,700.
It Will Be Alright
And here’s the thing: we know it’ll be alright. We don’t know when this whole thing will be over, when the recession will be over, or when the market will come back. We just know that it will be over. We believe that it will be alright at some point. We maintain belief in the long-term success of our plan—in long-term investing. We know that it will be alright as long as we stay the course and we’ll be in it for the next 200% advance.
And we’ve been here before, right? One of the things that I mentioned in the list of the 15 years of catastrophes that we just went through a little bit ago was facing inflation, a recession, and a frantic bear market right now in October of 2022. And we’ve been here before, because that’s actually the title of the June 5, 1970, cover story of LIFE Magazine. The title is “Inflation, Recession, and a Frantic Bear Market.”
We’ve been here before. History doesn’t repeat itself, but it does rhyme and sometimes very closely. And we know what happened after all of that uncertainty. On the day the magazine article came out, June 5, 1970, the S&P 500 ended the day at 76. At 76. We closed this last quarter at 3,585.
This means that anything you would have invested when this article came out talking about the imminent recession, the inflation they were facing the frantic bear market that they were in the middle of, anything you’d invested back then would be up 210 times over what you have. But if you had invested a million dollars you’d have $210 million. If you threw in $10,000, now you’d have $2.1 million over that time.
We’ve been here before, even in the midst of everything that’s happened. We’ve been here before and it will be okay. The author of Ecclesiastes in the Bible says, “there’s nothing new under the sun.” Or as President Harry Truman put it, “The only new thing in the world is the history you don’t know.”
We’ve been here before we got through it, and we’re much better from it. And the same thing will happen with where we’re at right now.
So, should you get out of the market? Not a few have a plan. Stick to the plan, and everything will be alright.
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This article is educational only and is not intended to be investment, legal, or tax advice or recommendations, whether direct or incidental. Again, this is not investment advice. Consult your financial, tax, and legal professionals for specific advice related to your specific situation. Never take investment advice from someone who doesn’t know you and your specific situation. All opinions expressed in this article are the opinions of the people expressing them. Any performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be directly invested in.