This is the advice I’m giving in this issue. Regardless of how turbulent the market becomes, don’t panic. When it seems every pundit is predicting a worsening of economic conditions, don’t panic. When you see your portfolio dropping in value, don’t panic.
I could write a lengthy essay telling you not to panic, or I could show you how much wealth is forfeited by panic selling. Such an illustration would not pull data based on scenario analyses (e.g., Monte Carlo simulations), but rather it would use data from a portfolio an investor could have easily replicated and followed. I chose the latter based on conversations I have had with many people. The feedback I’ve heard is that while simulated data is nice, they would rather see what would have really happened over the last X number of years.
So, I ran the numbers. First, I used the 26 years of data I now have from my rebalancing models. Then I looked to see what would have happened if an investor’s timing was terrible and he got into the market either near the top of the tech bubble (January 2000) or near the peak of the housing bubble (2007). The message using all three time periods was the same: Don’t panic.
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