10 Years After the Drop, More Proof You Can't Time the Market

No one knew precisely when the market would bottom out. People asked me if I could promise the bottom was near and, of course, I told them I couldn’t. All I could say was, I’m pretty sure capitalism will survive, and let them know I rebalanced to buy more stock funds in my own portfolio.  I said, “If capitalism is ending, then I’m going down with you.”

For ways to save and more, get AARP’s monthly Money newsletter.

It’s simply not possible to time the market perfectly, and few bought stocks exactly on March 9, 2009. But let’s say someone had the worst timing in the world and bought that total stock index fund on October 9, 2007, when the market peaked. Let’s also assume they had the courage to do nothing. The $10,000 investment would be worth $22,760 today, a respectable 7.5 percent annualized return. Even that 55 percent plunge doesn’t look so bad with a little more perspective. The numbers support the saying that “time in the market is more important than timing the market.”

What this means for you

Odds are very low that the bull will continue for a second decade, and a bear is likely. We know that logically, yet research shows we tend to extrapolate the recent past and expect it to continue. Our memories are short, and the pain we felt a decade ago is long forgotten. Though I keep hearing “that can’t happen again,” it absolutely can. I was reminding readers a decade ago that bad times don’t last forever, and now I’m reminding that good times don’t either. 

Keep in mind that you are now 10 years older and have less time for stocks to recover. Also, stocks may not recover as quickly after the next plunge. So here’s some advice for the next 10 years. Pick an asset allocation of stocks that you can live with and supplement it with boring bonds or bond funds or CDs. Don’t be so sure you have such a high-risk tolerance. Ask yourself how your lifestyle would change if stocks lost 50 percent or more and took over a decade to recover. When stocks do plunge, sell some of those boring bonds to buy more stocks, because it’s much better to buy when stocks are on sale.

Allan Roth is the founder of Wealth Logic, an hourly based financial planning firm in Colorado Springs, Colo. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and others. His contributions aren't meant to convey specific investment advice.