From the "a picture is worth a thousand words" archives, I'll add a few words and let this rest.

I've noticed that over the last several years, before and after our recent recessionary times, it has become fashionable to question the return on investment of a college education. There seems to be some validity to the question, particularly in light of some of the more innovative "college educations" that are currently available for sale.

Although I haven't always been the best student I can be, I have always valued education, and I think a degree has value beyond the simple ROI it brings in terms of enhanced wages.  As a technology manager, I also hired more than a couple of non-degreed professionals into serious, professional technical roles.  Generally speaking, they were very smart and very capable, two things a degree doesn't guarantee.  However, everything else being equal, it's nice to know that the person you're hiring has shown the fortitude and persistence to get his or her butt out of bed every day(ish) to get to the end of that sometimes grueling road.  That matters, and getting a degree acts as a signal to potential employers that has nothing to do with intelligence, and often little to do with specific knowledge.  It's not the only signal, but it's a powerful one.  I think these numbers from the excellent CalculatedRISK blog bear that out.

In the paper "The impact of staying invested during market turmoil", Russell Investments presents some data demonstrating the consequences of several different courses of action during the 2008 financial downturn, through the end of 2010.

The data shows what would have happened if a hypothetical investor had a $100,000 portfolio, and had invested 60% of the portfolio in a broad index of stocks and 40% in a broad bond index on October 9, 2007, and then took one of three steps on September 30, 2008.  The initial date - October 9, 2007 - was the height of the market prior to the downturn.  September 30 was about two weeks after the Lehman Brothers bankruptcy, and was a point of inflection that marked the front end of the most significant market drop during the downturn.

It's also worth noting that a 60/40 portfolio is a reasonable representation, but it isn't an optimized portfolio for most investors.

The Courses of Action and Results

Course 1 -  Stay the course and maintain the 60/40 index strategy through the end of 2010.  This would have yielded a portfolio value of $104,502.

Course 2 -  Pull out of the market altogether on September 30, 2008, going to 100% cash, as represented by a short-term Treasury Bill Index.  This was a typical (and understandable) fear-based move that was not at all uncommon during that time period.  Doing so would have allowed the investor to miss the worst of the downturn.  It also would have resulted in a portfolio value of $85,469 on December 31, 2010.

Course 3 -  Pull out of the market altogether on September 30, 2008, and invest 100% in a broader Treasury index.  This is another fear-based, defensive move that probably makes more sense than going to all cash, but likely wasn't quite as common.  In this case, the investor would also have missed the most severe segment of the downturn.  This portfolio would have ended 2010 valued at $94,451.

The Bottom Line 

Clearly, staying the course in this case would have had a significantly more positive impact on continued wealth-building than taking other, more fear-based actions.  The years in question represent a small sample size, but also a very extreme example of the bottom falling out of the market.  Furthermore, investors with a deliberate strategy optimized for their level of risk tolerance generally would have done better than what the paper demonstrates.

Of course, what the paper doesn't show is the mental anguish associated with holding on when the world seems to be caving in around you.  This is especially tough when you have no idea where the market is going at any point in time.  The fact is, nobody knows what the market will do tomorrow, but we do know what it has done over long periods of time.  Hopefully this data will help to provide some context for how to approach the next market downturn.

It's hunting season in Arizona, and as I mentioned in a previous post, it pays to be well insured and to maintain an emergency fund.

Not an endorsement of Allstate Insurance Company, or hunting, for that matter.