What 2008-2009 Can Teach Us About Now

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introduction

Last week was the worst week for indices since the pandemic crash of early 2020. The S&P 500 (SPY) and Nasdaq (QQQ) are down more than 5% last week.

Data from YCharts

It’s interesting to note that the S&P 500 has fallen slightly higher than the Nasdaq. I won’t read too much into it, but expect the Nasdaq to outperform the S&P 500 as markets turn around. Of course he fell further.

in a bear market and extreme fear

Despite a good start to the week, both indices are still in a bearish market. A bear market, for those who don’t know, means a 20% drop from previous highs.

Data from YCharts

CNN

More and more people are now using the retrospective bias to say it was obvious and they knew it would be a fallacy. Don’t believe it too much. These people now often try to convince themselves that they know everything. just read that tweet From Thursday.

Twitter

If people are still telling you this sale is “normal,” don’t believe them. It’s not at all. We are living through historic times for the stock market, and not in a good way. This sell-off is the most brutal in almost a century. Not in size, but in the speed it shows.

I know it sounds scary, especially when you look at the all-time highs that are not too far in the past and at the same time still unattainable. But that’s one of the reasons I’ve always advocated incremental scaling. Even if you haven’t, don’t worry, the tide will turn eventually, even if it seems impossible at the moment.

We don’t know when, but the market will change at some point. It could be next week, next month, towards the end of the year, who knows, maybe in a year or more, we really don’t know.

I invest money like clockwork every few weeks, and if you have money to stake and look at it from a rational standpoint, not an emotional one, the lower the market stays, the more stocks you buy. You can buy the best companies of our time at a much lower price than you could some time ago. This means that this bear market is an opportunity, not a disaster.

fed

The reason for last week’s big drop was again macroeconomic news. The Fed decided to hike interest rates to 0.75%, not the expected 0.50%. That was the highest interest rate since 1994 28 years ago. I think the Fed is doing the right thing here. This sends a strong signal that tackling skyrocketing inflation is their priority and will do everything in their power to do so.

High interest rates are considered bad for stocks, but the worst part for most investors is the uncertainty. When will inflation end? Where does the interest end? Will there now be an inevitable recession? If yes, how long does it take? How serious will it be? There are many questions and nobody knows the answer.

Recessions are scary for many people (they lose their jobs or companies go bust), and the stock market is often right when it predicts them before they happen. The stock market typically falls six months to a year before the crisis really hits the economy. But not every time the stock market falls, a recession is looming. So we don’t know exactly what we’re going to see: bearish signals or false signals. I think there’s no question here that the potential for a recession is high enough, but there’s no absolute certainty that some will make it.

Regardless, I have always focused on the long term and will continue to do so. Some may note that the longer-term focus is weak because the stock has fallen so much. I let her have her moment. I’ve always focused on the long term, you can see all my articles since May 2016. My service is potential multibagger and my goal is to find stocks that have the potential to grow 10x in 10 years. I think it already reflects the long-term perspective.

Stocks usually go up. But there are times when they don’t. The stock market goes up seven years out of ten. If this is not the case, then you should pay special attention, because only then will you have an excellent opportunity to buy more for the same amount.

learn from history

,It was partly inspired by John Auther from Bloomberg)

For example, let’s go back to 2008-2009. The stock market was down 25% from its previous high on October 1, 2008.

Data from YCharts

Just to be sure, we were in a very bad financial position at the time. The entire economic system was on the verge of collapse. Lehman Brothers filed for bankruptcy two weeks ago. Compared to where we were then, this inflation and rate hike cycle is a walk in the park.

Let’s say you bought on October 1st, 2008, you would certainly hold up very quickly. what could have happened Over the next 5 months, your portfolio will lose another 40% from that point.

Data from YCharts

But at the end of 2009 you would have been almost floored if you hadn’t averaged your money on October 1, 2008, ie paid in a lump sum.

Data from YCharts

Previously, if you bought $1,000 each month, these would be the results (end period is December 31, 2009).

October 2008:

Data from YCharts

Nov 2008

Data from YCharts

December 2008

Data from YCharts

January 2009:

Data from YCharts

February 2009:

Data from YCharts

March 2009:

Data from YCharts

April 2009:

Data from YCharts

May 2009:

Data from YCharts

June 2009

Data from YCharts

July 2009

Data from YCharts

Aug 2009

Data from YCharts

Sep 2009

Data from YCharts

October 2009:

Data from YCharts

November 2009:

Data from YCharts

December 2009:

Data from YCharts

So these are your results if you start buying from where we are now.

Month beginning End
October 2008 $1,000 $996
Nov 2008 $1,000 $1,151
December 2008 $1,000 $1,357
January 2009 $1,000 $1,235
February 2009 $1,000

$1,354

March 2009 $1,000 $1,501
April 2009 $1,000 $1,375
May 2009 $1,000 $1,268
June 2009 $1,000 $1,176
July 2009 $1,000 $1,208
Aug 2009 $1,000

$1,122

Sep 2009 $1,000 $1,076
October 2009 $1,000 $1,080
Nov 2009 $1,000 $1,071
December 2009 $1,000 $1,000
rough $15,000 $17,970

As you can see, if you’re in the same position as you are now, you will outperform with the Dollar Cost Averaging strategy. The market is also down about 25 percent. But this is the most important chart for long-term investors. Suppose you bought on October 1st, 2008 and never touched that investment again. This will be your result:

Data from YCharts

Sure, it’s the S&P 500, but it’s important to remember that some individual stocks were up strongly back then. These are just a few examples from October 2008 to December 2009.

Data from YCharts

Looking back is easy, of course. But it’s exactly the same. If the market continues to decline, it may take another 14 months to get back to this point. It takes a long time, especially with all the negativity out there.

But don’t forget that in 2008-2009 the entire economic world collapsed. Not now, not even close. The S&P 500 then fell 56%, which I think is unlikely now, although no one can be sure.

People can prove anything with statistics. But so I wanted to take the same decline as 2008-2009, not the bottom. Here, too, your invested money initially fell sharply, more than 40%. This is still possible. But you don’t have to hold back to invest successfully, especially with the dollar cost averaging approach.

I hope this gives you an idea of ​​where I think we are. Yes, it was tough, but the tide will turn. It may take weeks, months or even more than a year, but in the meantime we can invest our money and make it work for us for a long time. It may be down in the beginning but I believe it will be fine in the long term like 2008-2009 at this point.

Zooming out is important. The stock will rise again and the stock market will, as always, surpass its all-time high. Some stocks won’t do well, true, but others will and will outperform your portfolio, no matter what the losers are. This is due to the different investments. If you invest $1,000, you may only lose $1,000, but you can reach up to tens of thousands of dollars. So a big winner can wipe out all the losers in your portfolio and still let you outperform the market.

JPMorgan strategist Marko Kolanovic wrote last Monday:

We keep our positive attitude. May is a blueprint for the year and offers record spread opportunities. With positions at record lows, bearish sentiment and our view that US consumers, global post-COVID reopening and China to be positive on stimulus and recovery, we remain positive on risk assets. There will be no recession. The war in Eastern Europe poses a significant risk to the cycle but is likely to lead to a firm settlement in H2. We believe the market will pare the year-on-year losses and result in a broadly flat year.

I’m not saying that Kolanovic is right. But I want you to hear one more vote than those who are just vying to highlight the points of greater deceleration. Like Kolanovic, they have no way of knowing what the future holds, even if they pretend the recession is already a given. It’s certainly a real possibility, but not as inevitable as some people would like us to believe.

Conclusion

For long-term investors who have money to invest, this could be a good time to add them to your portfolio, especially using the dollar-cost-average approach. Even in 2008-2009, when the situation was much worse than now, it was successful. While investors may not yet see the light at the end of the tunnel, it is there and will one day come. In the meantime, the money you invested in your bad feeling is now paying off.

In the meantime, keep growing!

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