The Crash of ’08 – how investor behavior affects returns 

In a number of articles about “the Crash”, I noted that the “boomer” investor, the majority of which are age 55 or so, certainly survived the crash mostly intact but had apparently reduced the amounts earmarked for savings including RRSPs. 

The stock markets have made a remarkable “V” shaped recovery and depending on what index you use, we can now say that the Crash has been largely erased and according to famed analyst, Mark Hulbert, “back in the black.”[1] 

As much as that DALBAR 2012 report uses quantitative research to indicate that average mutual fund investors underperform their own investments, the Crash of 2008  illustrates how underperformance can easily be achieved. 

In the Crash of 2008 and the resulting bottoming out of the stock market in March 2009, if an investor did nothing (a good thing, in a way), their investments (if they were following the stock indexes) made 0%. Your $10 investment started at $10, dropped to $5 and then climbed back to $10. 

The investor who bought at $10, sold at the bottom in despair at $5 lost one-half of his investment or 50%. The investor who bought at the bottom made out like a bandit. This investor bought at $5 and the recovery took the markets back up to $10. His rate of return is 100%. 

So in the above we have three scenarios. Do nothing, sell at the bottom or continue to invest. The rates of return potentially vary from 0% to -50% to 100% . 

Given the above, do we see how investor behavior affects investment performance? There is a big difference between a -50% return a 0% return and a 100% return. 

Sadly, for many investors, savings stopped soon after the Crash of ’08.  RRSP contributions were reduced to a mere trickle and the ultra low interest rates that followed the crash, seduced many of us to take on more debt. If we are taking on more debt, we are not likely saving much money. 

More debt, less savings, not a good retirement formula for the aging boomer who should be building a retirement nest egg that has to last 30 to 40 years after we retire.

DALBAR’s real world data tells us that investors can be their own worst enemy. What we do with our investments after we bought them can determine if we are a successful investor or not. 

The lessons learned from the Crash of 2008 are: 

1.    Do not stop saving during periods of increased market volatility.

2.    Be prepared to invest amounts during market declines.

3.    Allow markets time to recover. 

[1]  2007-09 bear market now totally erased By Mark Hulbert, MarketWatch  April 4, 2012, 12:01 a.m. EDT Wilshire 5000 Index:  http://finance.yahoo.com/q?s=^W5000