The past 14 years have provided an almost perfect and complete laboratory for learning important investment notions and concepts.
Starting in the year 2000 we experienced the most dramatic stock market bubble of modern times with the tech stock boom and bust. Then came the geopolitical stress of the 9/11 attacks and, later in the decade, a bona fide credit and real estate bubble that collapsed into a global credit crisis of such historic significance it threatened the very financial system itself.
During the calm between these storms our economy recovered and our stock market continued to provide investors with opportunities and positive returns. Now the U.S. stock market has entered the sixth year of the current bull market.
In quite real terms these tumultuous years have provided a lifetime of experience, and the lessons to be learned from enduring this period are not to be taken for granted. But will they to be remembered?
The first lesson? A long-term investment perspective works. Each of the negative periods during the past 14 years was fairly extreme, each was stressful. Those, however, who were able to maintain a longer term focus on at least a part of their investment strategy later reaped the rewards.
The current bull market, which started in 2009, reinforces this point. After the 2008 financial crisis and 50-percent plus decline in stock prices, investors were traumatized, tired and scared. As to be expected, many threw in the towel on investing in stocks and as the new bull market took root the initial gains were observed from the sidelines.
Eventually, however, courage was rediscovered and stocks were cautiously embraced. This courage was validated in 2010, but memories of the recent suffering remained fresh and caution continued to be the mantra of many; 2011 tested both this caution and courage as the second round of the credit crisis, the European version, increased market volatility.
For those who stayed the course, the gains or 2012 and 2013 were the reward, and after two strong years without a material reversal investing has become comfortable again, and now it is this comfort that will provide a test of the second lesson.
The second lesson? The stock market is a stressful place. There will be corrections, there will be crashes. Maintaining a balanced exposure toward stocks and investment discipline during the good times will largely determine one’s ability to find the fortitude to endure the bad times. Or stated simply, over-exposed investors who lose too much during corrections are more likely to make poor bear-market decisions.
My experience is many portfolios are once again drifting out of balance. After a year in which stocks provided remarkable gains and bonds were flat or negative, this is natural. I know very few investors are excited about bonds and fewer about zero-percent cash, but maintaining balance now when stocks look like the only game in town may just determine your success later when the sky is falling.
Opinions are solely the writer's. F. Marc Ruiz is a local investment strategist and co-host of "Your Mind on Money" at noon Mondays on WLPR-FM 89.1 The Lakeshore. Reach him at firstname.lastname@example.org.