How to Invest in Turbulent Times

Let’s play a game – one that tests your investing discipline and resolve. By the end of this game, you will have learned two foundational secrets of investing. Knowing these secrets will separate you from nearly every investor.

Monday, October 9th, 2017 was a significant anniversary that, for most part, went unnoticed. To understand its importance, let’s rewind the clock and go back a decade.

On October 9th, 2007, the S&P 500 reached a pre-crisis peak of 1,565. But over the next 18 months, the stock market would shed more than 50%, with the S&P closing at 676 on March 9, 2009. Credit markets froze, Lehman Brothers filed for bankruptcy, a large segment of the financial industry was nationalized, unemployment hit 10%, and the economy entered its deepest recession since the 1930s. Bailouts and stimulus bills amounting to trillions of dollars were passed to calm both the markets and investors. Here are a few more things that happened after the 2007 market peak:

● Taxes went up for every bracket

● The healthcare sector underwent major structural change

● Government spending pushed our national debt past 100% of GDP, and there is no end in sight to our massive budget deficits

● Recovery from the Great Recession has been moribund at best

● The US continued its wars in Afghanistan and Iraq, while terrorist attacks have become almost normalized

● The nihilistic North Korean regime developed the capability to deliver a nuclear payload to the west coast of North America

● Corruption and polarization made even basic governance nearly impossible, and a reality TV star was elected president.

With all of this in mind, let’s get back to our game. Imagine you could hop in your time machine and travel back to October 9, 2007. Upon arrival, you must invest in only one asset class to see you through the tumult of the next decade as we reviewed it above. Here are your choices: Cash, Oil, Gold, Housing, the S&P 500 (stocks), or a 10-year Treasury Note (bonds).

If you were trying to maximize your return, using all the knowledge you have of events to come, which investment from this list would you choose?

Be honest!

With foresight into how rough the next ten years would be, it would seem downright foolish to invest your money in the stock market right at the peak. And yet, when you include both price appreciation and dividends, equities were the best-performing asset class over the decade. With an annual return around 7.2%, your stocks would have effectively doubled in value.

Gold was next best, but lagged stocks, averaging 5.7% annually.

The 10-Year Treasury Note would have yielded 4.7% over that time (but you would reinvest that at today’s rate of 2.3%).

Oil fell by an average of 4.3% per year, and home prices on average increased 1% per year.

Cash, perhaps the most comforting of assets, would have yielded 0.4%, though your real value would have been eroded by the 1.6% average annual rate of inflation, dragging your return into negative territory.

Certainly, you may have felt more comfortable being invested in “safer” assets like cash or bonds, but you would have paid a large premium for that comfort. If, though, you had ignored the things outside your control and gone about your daily life while keeping your money in equities, you would have made the best possible return on your capital.

This brings us to our critical secrets:

Investment Secret #1: If you can do what most others cannot and invest your money with discipline and resolve, you will be generously rewarded.

Think about it: if you had put all of your money in the stock market on the single worst day in the last decade, you would still have earned a fairly respectable rate of return, but you would have had to resist the urge to move into a less volatile asset class. That last part is critical, and it’s the most difficult part of this secret to execute.

Investment Secret #2: It’s going to happen again.

So don’t worry too much if you didn’t have the opportunity to demonstrate how brave you could be in the face of market turmoil like we saw in 2008 and 2009. You’re going to have plenty of opportunities to put these two investing secrets into practice in future crises, however they may manifest themselves.