Remember October 9, 2007, a day exactly ten years ago?
It was exactly 10 years ago today on Tuesday October 9, 2007 that the S&P 500 peaked at a then all-time high record, closing at 1565. The next day started the beginning of its painful descend. It was a long journey that lasted 17 months and resulted in a 57 percent drop of the S&P 500 index. This was the worst bear market loss in the last 80 years. It was not only an economic, and financial loss. It was also a loss of confidence in the system.
With a 20/20 hindsight, let us look at the momentous year that followed this day. 2008 was a year many of us should not forget. The S&P 500 is an index which is made up of 500 stocks chosen for market size, liquidity and industry group representation. It is a market value weighted index with each stock's weight in the index proportionate to its market value. It is normally taken as a proxy or benchmark for the US stock market. S&P 500 index lost 38.49 percent in 2008. In the same year, Barclays US Aggregate Bond Index, which is a common benchmark for bonds in the US, gained 5.24 percent.
An individual investor holding an entire portfolio in US stocks on January 1, 2008, would have lost close to 38 percent by end of 2008. On a dollar basis, if someone had $100 in their portfolio on January 1, 2008, that portfolio value would have been close to $62 on December 31, 2008. On the other hand, if it were a portfolio of 60 percent stocks and 40 percent bonds, portfolio value on December 31, 2008 would have been $77.
Purpose of above exercise is not to play a number game. For individual investors, our portfolios are hardly ever a slot machine. Rather, they are the conduit for our goals and dreams. Above exercise is more to demonstrate how much risk each one of us should take so that market behavior does not end up wiping our dreams and goals away.
With 2008 fast approaching a ten-year landmark, fund and ETF performances will not include 2008 losses in their ten year returns. Intensity of human memories tend to be short. And we have witnessed a 103-month long bull market as of today. Once we are past the ten-year anniversary of 2008, do not be fooled by the last ten-year performance of funds and ETFs. The risky parts of investments would be under the cloak of time. It is for smart investors to know not only the importance of their own personal dreams and goals but also the history and nature of stock markets, and how to chart their investments to reach their goals.