Distractions Cost Investors 115%

Distractions Cost Investors 115%

by Michael Batnick, The Irrelevant Investor

The S&P 500 is now up 270% from the lows made in March 2009, but how many people were actually able to harvest those gains? In the 89 months since the market bottomed, investors have had had a barrage of distractions thrown at them. From the Sequestration to the Fiscal Cliff and from China to Greece, walls of worry seemed to just blur into one another. And unfortunately, many investors allowed these fears to drive their decisions. Since March 2009, the largest S&P 500 ETF, SPY, grew at an annualized 18.08%. But over that time, investors in SPY earned just an annualized 11.82%*. The difference between 18.08% and 11.82% over 7.5 years is a whopping 115%!

Today I want to revisit what was potentially the most disruptive distraction to one’s financial well-being since that time; the double-dip recession scares that first arrived in 2010, and then revisited investors in 2011. You can see below, not coincidentally, that Google searches spiked for “double-Dip recession” after stocks had already declined. This is why Paul Samuelson once said “Wall Street indices predicted nine out of the last five recessions”.

Investors spend a lot of time fighting the last battle, so it’s understandable that after a 58% fall in stocks and the worst business contraction since the Great Depression, any market decline stirred fears of “here we go again.”

Double-Dip first came to the scene in 2010 when the S&P 500 fell 17%. And due to the severity of the Great Recession, not paying attention to the financial news wasn’t a realistic option. Below are a few quotes taken from that time to show how difficult it was to stay on the horse and hold stocks.

1. A June 2010 CNN Money perfectly captured the mood at the time: “Europe’s debt crisis. Companies still not hiring. The Gulf oil spill. These are uncertain times to say the least.” 
2.  In a March 2010 Forbes article, Beware Of A Double-Dip, Nouriel Roubini, the biggest bearish rock star at the time said “As early as August 2009 I expressed concern in a Financial Times op-ed about the risk of a double-dip recession”
3. In a May 2010 New York Times article, Fear of a Double Dip Could Cause One, Robert Shiller asked “Will individuals continue to support the market, which is now highly priced?”

Only these double-dip fears never came to fruition and U.S. stocks rallied 35% over the next year. But then, five years ago this week, Standard and Poor’s removed their triple-A rating for the U.S. for the first time ever. The S&P 500 responded by falling more than 4% three times in five days (U.S. stocks have not declined 4% in a day since). The calls for a double-dip recession grew even louder as the S&P 500 fell 21.6%.

Tuning out the noise of the double-dip calls from 2010 was hard because hardly any time had passed between then and the market crash. And tuning out the noise from the 2011 double-dip calls was hard because at that point stocks had already rallied 100%. It’s understandable for investors to wonder if they were getting greedy.

Below are some more quotes, to emphasize again how difficult it was to ignore the drumbeat of scary economic news.

1. “It’s either just begun, or it’s right in front of us,” said Lakshman Achuthan, the managing director of ECRI. “But at this point that’s a detail. The critical news is there’s no turning back. We are going to have a new recession.” September 2011 CNN Money  Forecast Says Double-Dip Recession Is Imminent
2. “If history is a guide, the odds that the American economy is falling into a double-dip recession have risen sharply in recent weeks and may even have reached 50 percent.” September 2011 New York Times Rising Fears of Recession
3. “Some economists will quibble, but I think it is fair to say that the dreaded double-dip recession is at hand. However it is labelled, the economic relapse is sure to have a big impact on politics.”  July 2011 New Yorker G.D.P. Shocker: U.S. On Verge Of Double-Dip Recession

People think that sitting through a bear market is one of the hardest parts of investing. And while there is definitely truth to that, the 115% gap shows that sitting through the recovery is no walk in the park either.

*Thank you Jeffrey Ptak for this data.