What Have We Learned- Or Not?

Todd Washburn |

February certainly hasn’t been like January- or 2017 for that matter.  I’m not talking about the weather of course, but that creature we call “the market”.  Last year, and early this one, to keep in the Olympic spirit, were like a cross-country skiing event- relatively smooth, consistent pace, and continuous progress towards the finish.  February, well, it’s been more like snow-boarding the half-pipe or skiing moguls.  Lots of speed, ups and downs, and a decent possibility of crashing and burning.  Prior to February- safe and secure.  February- not for the faint-of-heart.   Both situations weren’t what we might call “normal”, though the latter might in some ways be closer.

The question is- did we learn anything from our experiences during the Great Recession (GR) in ’08-’09?  If we did, have we already started to forget them?  I think the answer is a qualified “yes”- for both questions.  I do think many “average” investors took away some valuable lessons from the GR.  In the decade since, the shift from active to passive investing has been incredible.  Active investing is when the manager of a mutual fund or exchange-traded fund (ETF) tries to beat the return of the market or a sub-set of the market (i.e. an index) by frequently buying and selling securities.  Passive investing is when a fund or ETF manager is trying just to match the return of the market (up or down), typically by buying the same shares in the same proportion as in the index the fund/ETF is trying to match in returns.  The active vs. passive debate has raged in the investing world for an awfully long time.  Since the GR, in following the beliefs of folks like Jack Bogle (who founded Vanguard) and even Warren Buffett (who recommended his heirs invest in an index fund), money has aggressively flowed towards passively managed index funds.  A question is- is this a positive change?  I think so.  While passive investing doesn’t mean “no losses”, it typically is a much cheaper way to invest (no real research being done so fewer costs to run the fund/ETF), and seems to encourage longer-term investing since you- the investor- has decided beating-the-market isn’t the goal.  How’s this been working?  We didn’t really know until February.  But following the extreme volatility early in the month, Vanguard (the king of passive investing) reviewed what happening with its investors.  97% did nothing.  No trading.  They rode it out.  As of this writing, they’re not made-whole yet, but certainly nowhere near the bottom.  Meanwhile, other reports indicate outflows from equity (stock) mutual funds and ETFs reached record-levels during the volatility.  Obviously, some folks still either want to try to time the market, or panicked and jumped ship.  Neither will likely go well- and both mean those folks now have to make another decision- when to either go back into the market and/or into equities.  Will a possible poor decision be followed by a good one- or more of the same?  Hard to tell.

It was encouraging to hear people in interviews saying, yeah, markets go down but they had time and weren’t going to monkey with things.  Sure, the drop wasn’t the magnitude of the GR nor did it take place over as long a period of time.  But this (a 5% - 10% drop) isn’t that rare.  And that’s all it was.  For perspective, the 500 point drop back in 1987 constituted a 23% drop- in a day.  Now that’s volatility.  So I think we did learn some things from the GR.  One, you make money slowly and over time.  Two, making changes means making two good and timely decisions- when to sell and when to buy (or vice versa).  Three, costs matter, especially if returns are lower.  Sure, some folks have started forgetting those lessons (or never fully learned/accepted them), but it was heartening that with the first real shock in the market in over a year, the average-Joe (all of us) didn’t toss-in-the-towel.  We’re learning.