What To Do After You Suffer Significant Investment Losses

Note – I wrote this post originally 0n March 17, 2009 when pessimism was at it’s peak. I suggested that investors hold on rather than give up. Turns out the advice made sense. (Nothing wrong with tooting my own horn once in awhile…right?)  I thought it made sense to republish it today to reinforce these lessons under less stressful conditions.  

When the market deals you a terrible hand, what is the best course of action?  Hold ’em or fold ’em?

Of course there is no perfect answer.  Nobody can foretell the future.  But if history is any guide it probably makes sense to stay the course unless your investment decisions are the cause of the losses. In the past, the biggest rallies occurred right after the bear market ended. A good example is what happened in the early 1970’s. The market lost 38% in the 12 months ending in September 1974. The market soared 38.1% over the next 12 months. But how long would it take to get back to even?

If you had $10,000 in September 1973, it would be worth $6,110 12 months later. A year after that it would be up to $8,438. But two years and two months after that, your account value would be over $10,000.

No doubt…this roller coaster ride would have been very uncomfortable to sit through.  This was particularly true if you used the money to generate retirement income. In that case, it was imperative to use bear market withdrawal strategies. But at the end of the day, you had to be in the market in the beginning of the rally (when things seemed the very worst) in order to get the maximum recovery potential. Of course, not all recoveries are so explosive and powerful, but waiting can be dangerous.

Of course, I can understand why people are gun-shy at times. You’d have to live in a cave not to be shell-shocked when things get ugly. But please, when all the geniuses on TV tell you it will take 20 years for the market to recover, ask yourselves why these brainiacs didn’t predict the 2008 meltdown in the first place?

Here are some steps you can follow to take off some of the pressure after significant market drops:

1. If you can delay retiring, consider it. You’ll boost your Social Security benefits, have more years to fund your accounts and reduce the number of years you’ll draw on your accounts.

2. Cut spending. Make sure you get rid of your debt before you retire.

3. Consider working part-time. What if you are already retired? Why not consider part-time work? It certainly couldn’t hurt you…right?

When the market cascades painfully lower things will seem hopeless – but they won’t be. That’s what history demonstrates time and time again.  There is a time to sell your equities of course.  But it’s probably not during market panics.

And remember that you have a much longer investment time frame than you think.  If you are 65 years old today and draw on your accounts, how long will you draw on them? Maybe 20 or 30 years…or more. Do you have time to make up those losses? Yes…you certainly do.  It doesn’t feel like that….but it is true.

The chart below summarizes previous market declines and how the market did shortly thereafter. This is of course no guarantee of future results. It does however make a strong case for what I’m trying to say above: the riskiest course of action after big market drops is to stay in cash.

	Returns	Returns	Ave annual
	Past 12	Next 12	returns over
Date	Months	Months	next 5 years
Sep-74	-38.90%	38.10%	16.80%
Sep-01	-26.60%	20.50%	7.00%
Mar-03	-24.80%	35.10%	11.30%
May-70	-23.30%	34.70%	7.30%
Aug-88	-17.80%	39.00%	15.80%
Oct-62	-14.90%	35.30%	14.30%
Jul-82	-13.40%	59.40%	29.70%
Sep-66	-12.00%	30.60%	8.70%
Dec-57	-10.80%	43.40%	13.30%
Sep-90	-9.30%	31.30%	17.20%