Five years ago yesterday, the Dow Jones Industrial Average hit the low point of the 2008-2009 bear market. On March 9, 2009, the Dow bottomed out at 6,547.05, a gut-wrenching 54% below its prior all-time high of 14,164.53 set on October 9, 2007. To many, the sky seemed to be falling.
In the midst of that crisis, some experts suggested abandoning stocks altogether:
“Whatever money you may need for the next five years, please take it out of the stock market right now….”
(Advice from CNBC’s “Mad Money” host Jim Cramer on 10/06/08 during an interview on TODAY.)
As we mark the fifth anniversary of the market low, I wondered, how might someone taking this advice have fared since then?
As of Friday’s close, the Dow was at 16,452.72. The DJIA bottomed out five months after Cramer made his recommendation, and has moved higher from that point forward to today. Anyone taking Cramer’s advice would have taken quite a financial bath, having sold near the bottom.
Let’s assume an investor started with a $1 million all-stock portfolio on October 9, 2007, sold out per Cramer’s October 6, 2008 recommendation. They would have cashed out at $702,847.18, for a loss of 30%, and assuming they never got back in, earned miniscule money market returns since then. By contrast, investors who stayed in would have $1,161,543.66.
To be fair, Cramer’s advice appeared heartfelt and well-intentioned. And the markets were pretty terrifying. And the truth is, Cramer could have been right. Lest it seem like I have singled him out, he wasn’t the only expert advocating a wholesale move to cash, and he did make clear that investors who felt comfortable with risk and didn’t need cash from their portfolios for the next five years might be okay staying put. But that’s not the point.
The point is that the latest crisis won’t be the last downturn to test our resolve and our reserves. That’s why it is important to take time now to create a portfolio designed to meet both your particular short-term and long-term needs and to understand how your plan is structured to meet those needs, so you won’t feel the need or even urge to panic sell – or panic buy – ever. Here are two strategies to help you accomplish that feat:
1. Those who have strong foundations of cash and credit don’t have to sell their holdings at low prices when things get scary. How are you doing with yours?
Plenty of cash and access to credit can put a nice, big wall between you and the need to sell in down markets. Think about how you fared during the 2008-2009 crisis:
- Did you have sufficient cash reserves and solid access to credit (e.g., home equity lines, lines of credit, credit cards)?
- Did you have the ability to cover 3-24 months of living expenses from these sources?
- If you had less than you’d have liked, have you since brought your reserves in line with the amount you wish you had back then?
I agree with Cramer on this one point – when you’ve got enough cash to cover your short-terms needs in the event of a market downturn, you give yourself the luxury of being able to ride it out.
2. Those who need cash from their portfolio to live on usually feel better when they understand the plan for getting that cash flow during down times. How comfortable are you with your withdrawal plan?
All but the most aggressive GV Financial Advisors’ model portfolios allocate some money to cash and bonds. As we saw in the 2008-2009 downturn, when stocks go down, bonds and cash may fare better. It can be comforting to do a quick mental calculation of how many years of cash flow just your bonds and cash could cover.
For example, let’s say you have a $3 million portfolio, from which you need to withdraw $100,000 per year to maintain your lifestyle. Assume 30% of your portfolio is invested in cash and bonds, for a total of $900,000. That would give you about nine years of potential cash flow relying on your cash and bonds alone. This “quick and dirty” calculation can give great comfort: “I won’t be forced to dump shares when the prices are down. I can keep on spending money and I am going to be okay. As much as I’m not enjoying this, I have put myself in a position to ride out this downturn.”
Is it time to review your reserves or brush up on your own plan? A good financial advisor should be able to help you calculate sufficient cash reserves and understand your own withdrawal plan.