The Third Pig

1. Stay put. It was not the time to sell and investors that opted out of the market by withdrawing funds would likely lose out on a strong recovery.

A recent study by DALBAR showed investors on average have a very strong track record. Unfortunately it’s a track record of making the wrong investment decisions at the wrong time! Had most investors stayed put in their funds, which they did not (see results), they would have enjoyed a one year return of 32.20% compared to 26.45% for the S&P 500 by the end of 2009.

That habit of selling into down markets results in poor performance over a long period. For the period ending 12/31/2009, the S&P 500 returned 8.10% for the last 20 years (the 1990′s and 2000′s). [Correction]: Investors in mutual funds only received 3.17% over that time, just above the rate of inflation which was 2.8%. Unfortunately, investor “mis” behavior costs dearly. The fact is in 15 years I’ve seen over and over those invested in growth equities sell low and buy high when left to their own devices. In 2009 our Core Model Portfolio returned 43.04% and in 2010 it returned 20.37%.

Result: Investors fled the equity market, withdrawing $234 billion from equity mutual funds in 2008 and another $9 billion in 2009 and as of September of 2010, have withdrawn another $29 billion (see here & here).

2. Buy more: Participate in the stock market’s recovery because stocks are cheap relative to their business value.

I said the market will likely return above its historical 10.5% return (at the time). I went as far as to say, although there is no guarantee, the market could easily return 15% over the next 3 to 5 years.

Result: In the two years ending December 31, 2010 the Wilshire 5000 has returned an annualized 22.6% and the S&P 500 returned an annualized 20.6%.

3. Wait until real estate prices bottom: Since I felt real estate prices would continue to fall, the bargain Client X thought he was getting was less of a bargain than he thought.

Real estate, like all assets, advance and decline. The nation had been lulled into believing real estate prices only go up. So when they were declining many still held on to that belief, telling themselves, "Any day now this thing is going to turn around." Well it didn't just turn around. In fact, real estate prices are still in the process of correcting.

Result: At the end of 2008 the average home sales price was $198,100. As of September 2010, that price had declined to $171,700. That’s a decline of 13.5%.

4. Wait until mortgage rates improved: Home mortgages would be hard to get.

Result: The Fed's quarterly survey of senior bank loan officers assesses supply and demand for bank loans to businesses and consumers. The past few reports (here and here) showed that banks had been easing lending standards for large corporations.

Pretty much, everything I told Client X came to fruition. Investors fled mutual funds and those who did are likely to see their returns lag the market over the long term. The stock market is recovering handsomely. Real estate prices continued to decline (but are hopefully stabilizing). And lending practices are beginning to ease. I am no fortune teller. But a little patience and some broad perspective helps in making wise financial decisions especially when it comes to the stock market.