It’s hard to believe it’s been ten years since we were in the midst of one nasty recession. The financial crisis of 2008, as it is known, was brought on by greed. The global economy became infected with poisoned debt from subprime loans created by financial “wizards” for people who should not have been buying homes in the first place. Housing prices started dropping after reaching their peak in 2007, and the “highly rated” debt instruments suddenly turned to junk status. Fannie Mae and Freddie Mac guaranteed these speculative loans. Lehman, Countrywide Mortgage, and AIG all failed among many others, and then lending started to freeze up. The government had to step in to save our financial system. How’s that for a history lesson?
The Dow Jones Industrial Average (the market) dropped 54.1% from October 9, 2007 to March 9, 2009, the day the market bottomed out. The Dow was at 6507 at that point from a high of 14,164. Today we sit at 26,640 – 20,000 points higher! The economy is strong, housing prices have recovered for most, and most people are feeling pretty good about things with maybe the shenanigans in Washington DC being the exception. As financial advisors, we were on the front lines during the crisis. We heard the terror in our clients’ voices. We felt the pain of the market losses. We even wondered if we would be able to survive! So what did we learn from the experience that you can take with you when the next market correction or crisis occurs? We think a lot and here are the key points:
Keep Calm and Carry On
Don’t panic and sell when things get bad. The people that ended up losing in 2008/2009 were those who reacted emotionally to what was going on around them, sold their stocks, and put their money in cash. They lost because they missed the fast recovery that took place. It only took four and one-half years to get back to even, and look what’s happened since 2013! It only took seven and one-half years after the great depression of 1929 when you account for dividends. Your emotions are your worst enemy, and market timing simply doesn’t work.
Respect the Rainy-Day Fund
Keep enough of a cash buffer to get you through the rough patches that are bound to happen in life. And, if you have excess cash, use market downturns as a good reason to invest. You will likely be rewarded for your courage. And, consider investing regularly. Doing so will enable you to buy more shares when stock prices are low and fewer shares when stock prices are high—this is known as dollar-cost-averaging, it’s your friend in regular investing, embrace it!
The best plans account for the worst cases
Create a financial plan and stress test it for bad markets. Understand what effect a market correction would mean for your life and financial situation. Then adjust your allocations accordingly. Maybe you don’t need to be taking the kind of risk that you are currently. Understand what the least amount of risk you can take so you won’t run out of money. Know what it is. It doesn’t mean you need to allocate that way, but, it’s good to have a baseline and be thoughtful as to why you are investing the way you are. Right now just might prove to be a perfect opportunity to make adjustments since we are at all-time highs in the market. Don’t wait until we are in the midst of the next crisis to find out. And, the next crisis will eventually come.
Diversify, Diversify, Diversify!
Reduce your exposure to concentrated stock positions or market styles. For example, chances are your large company stock allocation has exploded in recent years. Be careful not to get lulled into thinking that this gravy train will continue forever. Rebalance your portfolio now, before disaster strikes. We’d be willing to bet that those who held concentrated positions of Fannie Mae, thinking it was safe, regret that decision today. And, be sure to consider taxes but don’t let the tax tail waive the investment dog. Meaning, it’s OK to pay taxes from time-to-time on your gains to keep your allocations in line. In short, diversify your investments and don’t become complacent.
Tune out the media
Turn off CNBC and Mad Money and throw away the remote. We learned a long time ago not to “guess” what might happen in the markets. We can’t even tell you the last time we tuned in and our clients were up handsomely in 2017 by being disciplined. Had we listened to the talking heads we would have probably been out of the market entirely. After all, weren’t we due for a correction last year?
Find a fiduciary
Work with financial advisors who operate as a fiduciary versus one who operates with a profit motive. Bank-housed representatives are there to sell you something and make a commission. Chances are they will be long gone when the next crisis strikes. Your financial advisor should communicate with you during the good, but, especially during bad times. Communication and a complete understanding of your life, financial situation, and goals are paramount to you realizing your objectives.
Use times of crisis in your life as an opportunity to get better. Being brought to your knees can make you stronger and better if you allow it to. But, to be successful coming out of a low point requires a significant effort on your part. Face it, learn more, and then do something about it. You can probably spot those people and organizations who did so after 2008. That possibly just might be the most important lesson learned of all.
Understand the ins and outs of foreclosure. This guide explains the process & offers strategies for those struggling with foreclosure, along with resources for help.
Understand the ins and outs of foreclosure. This guide explains the process & offers strategies for those struggling with foreclosure, along with resources for help.
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Ten Years Later: Six Lessons We Learned From The 2008 Financial Crisis
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It’s hard to believe it’s been ten years since we were in the midst of one nasty recession. The financial crisis of 2008, as it is known, was brought on by greed. The global economy became infected with poisoned debt from subprime loans created by financial “wizards” for people who should not have been buying homes in the first place. Housing prices started dropping after reaching their peak in 2007, and the “highly rated” debt instruments suddenly turned to junk status. Fannie Mae and Freddie Mac guaranteed these speculative loans. Lehman, Countrywide Mortgage, and AIG all failed among many others, and then lending started to freeze up. The government had to step in to save our financial system. How’s that for a history lesson?
The Dow Jones Industrial Average (the market) dropped 54.1% from October 9, 2007 to March 9, 2009, the day the market bottomed out. The Dow was at 6507 at that point from a high of 14,164. Today we sit at 26,640 – 20,000 points higher! The economy is strong, housing prices have recovered for most, and most people are feeling pretty good about things with maybe the shenanigans in Washington DC being the exception. As financial advisors, we were on the front lines during the crisis. We heard the terror in our clients’ voices. We felt the pain of the market losses. We even wondered if we would be able to survive! So what did we learn from the experience that you can take with you when the next market correction or crisis occurs? We think a lot and here are the key points:
Don’t panic and sell when things get bad. The people that ended up losing in 2008/2009 were those who reacted emotionally to what was going on around them, sold their stocks, and put their money in cash. They lost because they missed the fast recovery that took place. It only took four and one-half years to get back to even, and look what’s happened since 2013! It only took seven and one-half years after the great depression of 1929 when you account for dividends. Your emotions are your worst enemy, and market timing simply doesn’t work.
Keep enough of a cash buffer to get you through the rough patches that are bound to happen in life. And, if you have excess cash, use market downturns as a good reason to invest. You will likely be rewarded for your courage. And, consider investing regularly. Doing so will enable you to buy more shares when stock prices are low and fewer shares when stock prices are high—this is known as dollar-cost-averaging, it’s your friend in regular investing, embrace it!
Create a financial plan and stress test it for bad markets. Understand what effect a market correction would mean for your life and financial situation. Then adjust your allocations accordingly. Maybe you don’t need to be taking the kind of risk that you are currently. Understand what the least amount of risk you can take so you won’t run out of money. Know what it is. It doesn’t mean you need to allocate that way, but, it’s good to have a baseline and be thoughtful as to why you are investing the way you are. Right now just might prove to be a perfect opportunity to make adjustments since we are at all-time highs in the market. Don’t wait until we are in the midst of the next crisis to find out. And, the next crisis will eventually come.
Reduce your exposure to concentrated stock positions or market styles. For example, chances are your large company stock allocation has exploded in recent years. Be careful not to get lulled into thinking that this gravy train will continue forever. Rebalance your portfolio now, before disaster strikes. We’d be willing to bet that those who held concentrated positions of Fannie Mae, thinking it was safe, regret that decision today. And, be sure to consider taxes but don’t let the tax tail waive the investment dog. Meaning, it’s OK to pay taxes from time-to-time on your gains to keep your allocations in line. In short, diversify your investments and don’t become complacent.
Turn off CNBC and Mad Money and throw away the remote. We learned a long time ago not to “guess” what might happen in the markets. We can’t even tell you the last time we tuned in and our clients were up handsomely in 2017 by being disciplined. Had we listened to the talking heads we would have probably been out of the market entirely. After all, weren’t we due for a correction last year?
Work with financial advisors who operate as a fiduciary versus one who operates with a profit motive. Bank-housed representatives are there to sell you something and make a commission. Chances are they will be long gone when the next crisis strikes. Your financial advisor should communicate with you during the good, but, especially during bad times. Communication and a complete understanding of your life, financial situation, and goals are paramount to you realizing your objectives.
Use times of crisis in your life as an opportunity to get better. Being brought to your knees can make you stronger and better if you allow it to. But, to be successful coming out of a low point requires a significant effort on your part. Face it, learn more, and then do something about it. You can probably spot those people and organizations who did so after 2008. That possibly just might be the most important lesson learned of all.
Chip Addis
CAddis@AddisHill.com
UP NEXT:
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Understand the ins and outs of foreclosure. This guide explains the process & offers strategies for those struggling with foreclosure, along with resources for help.
Chip Explains: Foreclosure
Understand the ins and outs of foreclosure. This guide explains the process & offers strategies for those struggling with foreclosure, along with resources for help.