A decade on from the stock market's financial crisis lows, investors should imagine: If they had bought at the bottom, what would they have done next?
True contrarians only buy stocks when it makes them feel physically sick. This week is exactly 10 years since the vomit-inducing moment when the S&P 500 (.SPX) hit an intraday low of 666 (rounding down), Citigroup (C) became a penny stock and General Motors (GM) was considering bankruptcy.
U.S. stocks stood where they had been 13 years earlier, the financial system was collapsing and investors thought a repeat of the Great Depression was on the way.
It was, of course, a great time to buy. Including dividends, investors who bought the S&P have made an annualized return of almost 18% since then. Those who bought Citi made 21% a year. Score 10 out of 10 for the contrarian.
It is easy to vow that next time—and there will be a next time—you'll be a buyer, not a seller. You will recognize the capitulation by investors, understand that governments won't allow the financial system to collapse and go all-in.
Except, how would you know? The market had been diving for months, and contrarians who bought in lost money too. The stock collapse in October 2008 after Lehman Brothers was scary enough to bring up breakfast, but far from the end.
After Congress rejected the TARP bailout the fall was even bigger, and governments and central banks agreed to unprecedented joint action to save the world economy. Contrarians who thought they timed it perfectly and bought at the Oct. 27 low in 2008 went on to lose 20% by the time the S&P hit 666.
If this sounds like a counsel of despair, there's worse. Even if you successfully picked the bottom, would you have held for 10 years? It's easy to say that of course you would be a buy-and-hold investor. But even with perfect hindsight there were plenty of great reasons to sell along the way.
In 2010, the Greek crisis came and with it the realization that the financial crisis would have long-lasting effects. In the U.S. fear of recession grew, the Federal Reserve reintroduced emergency bond-buying and the dollar slumped. When the S&P was down 17%, would you be calm, or selling to lock in what was left of your profit?
In 2011, through self-induced crisis, the U.S. came close to defaulting on Treasurys and lost its triple-A credit rating. The eurozone crisis turned critical, and investors realized that China's stimulus—the biggest of all the efforts to end the global financial crisis—would have painful aftereffects. The bull market came to an end, at least on an intraday basis, as the S&P plummeted 22% between May and October and emerging stocks fell almost a third. It looked like a global recession might be on the way. Again, would you be able to ignore the temptation to lock in profit?
It was even worse in 2012 for those watching Europe, as the eurozone appeared to be on the brink of breakup. U.S. stocks didn't react so badly, but the news was unrelentingly bad. It was tempting to get out before the market woke up to how big the danger was.
In 2013 came the Taper Tantrum, as markets worried that the Fed might be about to kill the recovery by raising rates, pushing emerging markets into a panic. Still, if you focused only on the U.S. you found it easier to hold on, with the S&P falling less than 10% at its worst point.
In 2014, there was an Ebola epidemic, U.S. bombing of Syria and more Fed concerns, and the VIX index (.VIX) of implied volatility jumped above 30 as stocks fell just under 10% in 18 trading days. If you phoned a friend for advice, it would most likely be "Sell!"
If you were still holding on to your stocks in 2015, it was probably because you had lost your trading account password. A Chinese stock bubble inflated and then burst, Beijing devalued its currency and an oil-price collapse brought fear of a new U.S. recession. From the optimism of the summer of 2015 the S&P had lost 15% by February 2016, as oil company failures threatened a wave of bond defaults.
If you somehow made it through, you were fine until last year's ructions. Did you sell in February, before the volatility shock knocked 12% off stocks? Or in October, before the bear market knocked stocks down more than 20% to December's intraday low? If you did, congratulations! You timed one of history's best-ever market runs, almost as good as the 10-year stretch from the 1990 recession to the dot-com bubble.
Those who sold at last October's all-time high for U.S. stocks might be proved right if the market rebound ends up being temporary and a recession drags down earnings and valuations. Or investors might once more shrug off fears, the economy lumbers on and stocks mount yet another surprising gain. It should be obvious that timing market lows is exceptionally difficult. Timing the highs is just as hard. But it's worth keeping that brokerage-account password handy, because the end of this cycle might not be too far off.