The Investment Lessons of 9/11

Today, of course, marks the eighth anniversary of the attacks on the World Trade Center and Pentagon.

While the nation pauses to remember those whose lives were lost that day, it's worth also recalling that the attacks' impact on the financial markets was surprisingly modest.

Consider an investor who was unlucky enough to have invested a lump sum in the stock market on the day before the attacks. Even though the stock market remained closed for several days after those attacks and then dropped more than 5% on the day it eventually reopened, it quickly recovered.

Within just two months, such an unlucky investor was actually sporting a profit.

Was that experience a fluke?

Probably not, according to a study conducted at the time by Ned Davis Research, which identified what it considered to be the 28 worst political or economic crises over the six decades prior to the 9/11 attacks.

In 19 of these 28 cases, according to the firm, the Dow Jones Industrial Average was higher six months after the crisis began. The average six-month Dow gain following all 28 crises was 2.3%.

Another clue as to that day's modest influence on the investment markets: The newsletters whose portfolios suffered the most during those attacks and their immediate aftermath have nevertheless performed nearly as well since then as those services that actually made money in September 2001.

The 10 newsletters that made the most money that month, according to the Hulbert Financial Digest, have lost an average of 0.9% annualized over the eight years since. The comparable average among the 10 newsletters that did the worst in September 2001 is a statistically indistinguishable minus 1.6%.

It's important to engage in drawing these investment lessons, even if you believe that there won't be another attack on U.S. soil of a magnitude similar to 9/11. That's because, at some point or other in the future, there will be some geopolitical crisis that will send the markets into a tailspin.

The lessons of history will be enormously helpful at such a time to provide a reality check on any emotional urge to give up on well-laid investment strategies.

Of course, impressive investment returns will never be able to overcome our emotional losses following those 9/11 attacks. But doing something rash in our portfolios helped no one, least of all those whose lives were lost.