Thursday, September 12, 2013

"Time is Your Friend, Impulse is Your Enemy"


On the bulletin board next to my desk here at work I have kept a copy of John Bogle's "10 Rules of Investing".

Bogle, of course, started Vanguard and the whole concept of index funds.  He also written 10 books and countless articles that are full of useful information for both professional and individual investors.

Five years ago, on September 15, 2008, Lehman Brothers went out of business.  The financial community was shocked - most expected that the government would step in to either find a partner or inject funds directly.  However, Treasury Secretary Paulson argued that Lehman could be allowed to expire without serious financial consequences.

In retrospect, it would appear that Secretary Paulson underestimated how precarious the markets were at the time.

As the chart above shows, and as we all well remember, stock markets plummeted in the fall of 2008, starting a gut-wrenching decline that did not bottom until March 2009. Only a few lonely voices (see: Warren Buffett) were urging the public to buy stocks; most only focused on the near-term risks.

Merrill Lynch's global equity strategist Michael Hartnett is out this morning with his regular weekly strategy piece.  He noted the fifth anniversary of the Lehman bankruptcy, but he also pointed out how much the markets have gained since that time period.

According to Hartnett, if you had bought U.S. stocks on September 15, 2008, and held them through September 12, 2013, your total return (including dividends) would have been nearly +60%.

To be sure, it would have been a hair-raising ride, particularly in the fall of 2008.  But Bogle's sage advise to ignore the near-term volatility, and focus on your longer term objectives, would have served most investors well.

Rule #1 of Bogle's 10 rules of investing is:  "Time is your friend, impulse is your enemy".

He also adds the corollary to "Buy Right and Hold Tight:  Once you set your asset allocation, stick to it no matter how greedy or scared you become."