From 2008 to 2009, even balanced portfolios lost almost 30% of value. It was, to say the least, a stressful time to have money in the market.
Each of the investors chose a different course of action:
- Investor 1, represented by the blue line in the chart below, decided to stick with her plan. She started with a 50/50 allocation, and didn’t sell out of the equities portion.
- Investor 2 couldn’t stand the pain of loss anymore. Although he initially had the same 50/50 portfolio allocation, he decided to sell all his equities to buy into bonds. He sold all of his stocks to buy bonds, feeling this was “safer.”
- Investor 3 felt she had to protect the money she had left, and she sold everything to move to cash.
- Investor 1 — who stayed put and stuck to her plan — regained all the lost value in her portfolio by mid 2010. By 2017, her portfolio balance was almost double the other two investors who panicked and couldn’t stick with their investment strategy.
- It took Investor 2 almost 8 years just to regain the lost value in his portfolio. And he’s far behind Investor 1, who stayed invested according to her plan.
- And Investor 3, who moved to cash to protect her money? Not only did she never make her money back, but she’s also the only one of the investors in this scenario who ended up with a realized loss.