How Quickly We Forget The Recent Past… Why?

Written by the William Allan team · Published 2022-07-01T12:00:00.000Z

On March 9, 2009, the S&P 500 price index reached its financial-crisis closing low. It had fallen about 57% from its October 2007 peak, excluding dividends. S&P’s historical review records the decline and the March low.

Ouch! It is easy to forget how uncertain that period felt once we know what followed.

The recovery from the financial-crisis low was strong, but investors living through the decline did not know when it would end. Choosing a major trough as the starting point illustrates a favorable historical sequence, not what another investor should expect.

Many investors who remained invested participated in the recovery. Their outcomes varied with holdings, contributions, dividends, fees, taxes, withdrawals, and behavior. A portfolio invested entirely in stocks also carried substantial risk and would not have suited every retirement investor.

Why Does a Correction Still Feel So Bad?

Even after a recovery, another decline can feel unsettling. I have a few ideas about why.

More Money, More Problems: A larger portfolio makes the same percentage decline larger in dollars. As a standalone illustration, a 20% loss is $450,000 on a $2.25 million portfolio and $50,000 on a $250,000 portfolio—a $400,000 difference in the loss. These are arbitrary starting balances for comparison, not results from a historical investment or contribution calculation.

Missing the Forest for the Trees: Focusing on a recent high can make a subsequent decline feel unprecedented, even when the investor has lived through other difficult markets. Historical context can help with perspective, although it cannot tell us the size or duration of the next loss.

Treating the Market as a Game of Chance: Regret over missing an opportunity to sell at the high can crowd out the more useful question of whether the portfolio still fits the plan. Neither the next high nor the next low is known in advance.

These reactions share an emotional component. We cannot simply remove emotion from investing, but we can give ourselves a decision process that does not depend on how reassuring the latest market headline feels.

Revisit the Purpose of the Portfolio

We invest in stocks for a reason. The appropriate amount depends on goals, time horizon, liquidity needs, and the ability to bear losses. Continuing contributions may support an accumulation plan; someone taking withdrawals must also consider the effect of selling during declines.

Recent highs and corrections are moments in a longer financial life. Reviewing the plan can help put them in perspective without assuming that a particular market recovery will repeat.

Neither short-term nor long-term market outcomes are known. Historical experience can help frame a plan, but losses remain possible at every horizon.

This commentary is for informational purposes only and is not investment, tax, or legal advice. All investing involves risk, including the possible loss of principal, and past performance does not guarantee future results.