A Ten-Year Lesson
An opportunity to reflect and learn from our past behaviors.
Senior Vice President
Ten years ago—on March 9, 2009 to be precise—the U.S. stock market hit its bottom in the fallout of the Financial Crisis of 2008. The S&P 500 closed at 676.53 that day, down nearly 57% from its all-time high established exactly 17 months prior.
Though it may seem like a distant memory today, the crisis and subsequent recession destroyed nearly nine million jobs in the U.S. and over $34 trillion of global net worth, calling into question the long-term sustainability of capitalism itself. 1
Albert Einstein once said, “Failure is success in progress”. Recognizing the ten-year anniversary of the crisis offers an opportunity to reflect and learn from our behaviors in tough situations. Ignoring this opportunity to reflect on the past is to eliminate the best method of learning. History suggests markets recover 100% of the time. Unfortunately, many investors do not.
The constant drumbeat of sensationalized news during times of market volatility is easy to get caught up in and allow to fuel emotions. Do you remember how you felt as an investor during this time and how it affected your thinking?
Through just the first ten weeks of 2009, the market was down over 25% and down 45% over the previous six months. The so-called smart money went to cash in late 2008 and early 2009, and for a few weeks—perhaps even months—they were right. However, at year-end 2009 the market was up 65% from the March 9 low and up 24% for the full year. Moreover, in the ten years since that low point, the market has quadrupled, producing an average annual return of nearly 18% during what has come to be the longest bull market in U.S. history. Those that took a longer-term view during the crisis would turn out to be the ones with the smart money after all.
So how did you feel as investor in late 2008 and early 2009? Did you make emotional decisions in times of stress? Did you add to your investments when market multiples hit record lows, did you panic and sell, or did you sit still? While nobody can consistently predict short-term markets, everyone should be able to better understand their behavioral tendencies in times of stress.
Having a clear financial plan while maintaining a journal that documents your emotional state when investing is one way investors can avoid short-sighted mistakes. Write down your feelings and reasoning as you make investment changes. Doing so allows you to reflect on your judgement over time and evaluate your decisions. Having that insight further allows you to ensure your risk profile is appropriate and holds up through rising and falling markets. Investors can also learn through experiences and avoid emotional decisions by relying on a coach or advisor. Removing emotions often requires an educated, objective professional that can address questions and prioritize what is most important for personal decision making.
Among his many noteworthy quotes on investing, is Warren Buffet’s comment that “The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.” Bear this in mind as you reflect on what occurred a decade ago and how you responded. It just might improve your investment success in the future.
1. Roosevelt Institute, The Crisis of Wealth Destruction, April 7, 2010; Center on Budget and Policy Priorities: Chart Book: The Legacy of the Great Recession.
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