2008: How To Avoid A Common Bear Market Mistake [Vanguard Total Stock Market ETF, Dow Jones Industrial Average]

Impact On Rest Of Life

Mortality tables tell us our healthy 55-year old male retiree will live 25 more years; a female would live 28 more years. The median “income lost” in our example was $22,623 per year (see yellow column in table above). Therefore, we can estimate the total hypothetical impact on retirement earnings for a male and female (see table below).

If our hypothetical 54-year old, one year away from retirement, was told on January 2, 2008 that his expected retirement income was going to be $588,207 less than he anticipated, do you think he would have asked:

Is there a better way to manage/mitigate investment risk?

Paying Attention vs. Expert Forecasts

Life is full of stress and uncertainty. Why do investors demand and crave stock market forecasts from Wall Street experts? Answer – it makes them feel better by adding a perceived element of certainty in a highly uncertain world of investing and retirement planning. Just because it makes people feel better it does not mean stock market forecasts and predictions are particularly helpful, a concept that is clearly illustrated with the 2008 example presented above.

Is there a perfect way to manage your investments and retirement plan? No, but there are numerous ways to improve your odds of success. More importantly, there are numerous ways to reduce the odds of making a major investment mistake, such as losing 38% in 2008. On June 22, in The Next Bear Market: How To Protect Your Assets, we walked through the worst part of 2008 step by step showing the probabilistic value of paying attention, rather than relying on forecasts.

But, Things Changed In 2008

A common argument against this type of analysis is:

No one knew how bad 2008 would get…things changed significantly during the course of the year.

We agree 100%. In fact, that is the whole point of the article. We live in a highly uncertain world. The financial markets have an almost infinite number of moving parts (valuations, central banks, geopolitical events, the economy, earnings, interest rates, terrorists, weather, natural disasters, speculation, etc.), which makes financial forecasting extremely difficult and not particularly useful. Our purpose here is to highlight (a) that forecasting is not easy, and (b) investors should think twice before placing confidence in the value of investment forecasting. If an experts says “everything should be fine over the next 12 months”, the facts are even the brightest of the bright cannot predict future events, and more importantly, how investors will react to those events.

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