The Tough Stuff That Separates Investors From Savers

October 16, 2017 Gil Baumgarten

October 9th, 2017 marked the tenth anniversary of the stock market peak in 2007. In the months that followed this peak, the market plunged deeper and deeper until the week ending October 10, 2008 became known as the worst stock market week on record. I took a moment to reflect on the damage this event inflicted.

Since I'm a cynic at heart, of course I thought about the worst that could have happened. Most would say the worst would have been if you invested your nest egg on the day of the peak, October 9, 2007. But really, the worst thing would have been if you had liquidated your investments in March of 2009, after the market had already fallen -57%. Unfortunately, this is precisely the move millions of investors made.

Consider these two scenarios: Suppose you had invested your nest egg in stocks at the peak in 2007 and held it for the past 10 years. To date, you would have generally experienced a total return of +63% (roughly 5% compounded) encompassing all the good and all the bad. On the other hand, consider that you had participated in the panic sale at the bottom and bought treasury bonds which many people believed to be the safer option. You would have just now recouped half of your losses, with about 75% of your principal intact. This is before you consider taxes. The IRS taxes interest on bonds at about twice the tax rate compared to gains or dividends in stocks. If this were an actual situation, you would have a disparity of more than 100%.

Many people blame stocks for producing disappointing results, but the truth is that they perform just fine for those who don't sell out at the bottom. Staying all in when it's scary is part of what separates the investors from the savers.

Here are a few other characteristics that separate investors from savers:

Investors do not require predictable outcomes.
Investors act; they don't react in order to suddenly do what's already too late.
Investors understand peaks and valleys are better than a guarantee.
Investors stay clear of get-rich-quick-schemes.
Investors are more optimists than pessimists.
Investors understand that you can't get something for nothing.

My goal with this musing is to encourage introspection so that you can adopt a permanent long-term investing philosophy . . . no matter what.