Yes, you would have saved yourself from steep losses in 2008 and early 2009. But you have to ask yourself: Would I have also had the courage to put money back in while the economy was still in horrendous shape in 2009, with double-digit unemployment and a banking system in tatters?
If not then, when would you have moved money back in? People who simply left their savings fully invested in the stock market in December 2007 have now made a 134 percent return on that money. Would you have done better than that, or would you have missed out on a big chunk of those gains out of the same caution that led you to pull money out of stocks to begin with?
People who did not panic in the fall of 2008 — the most panic-worthy time in most of our lifetimes — and kept putting their retirement funds into stocks did indeed incur steep losses over the ensuing months. But their newly invested funds were being put into stocks at the most favorable valuations in a generation, and thus enjoyed the full benefit of the rebound when it eventually came.
A truism of economic and financial cycles is that by the time it feels like the coast is clear and putting money into riskier investments is completely safe, the real money has already been made. People who looked at the economic chaos of early 2009 and stuck to their guns have ended up far better off than those who, convinced that a double-dip downturn was imminent, waited for years to get in.
This equation changes, of course, if we’re talking about money needed imminently as opposed to longer-term savings, such as for retirement. The economy looks stable now, but that could change — it’s still possible that markets and C.E.O.s know something about the future that isn’t clear in the data yet.
But that’s more of a fundamental argument about how your assets should be allocated. If an 18 percent drop in stocks is enough to cause you to change your entire investment strategy, that money shouldn’t have been in stocks to begin with.
The entire point of investing in stocks is that you get greater long-term expected returns in exchange for tolerating bigger ups and downs. Episodes like those of the last few weeks are, in effect, the price you pay for returns that are substantially higher than bonds or cash over longer periods.
Just as there are no free lunches, there are no excess returns without some volatility and risk.
As individual investors, we cannot control volatility. What we can control is our own mind-set and reaction, and the more level your head, the better your long-term results are likely to be.