(And Why They Are So Important Now)
I don’t want to talk much about the novel coronavirus today. I want to talk about money, because that is what I do here. Money may not be a priority for you and your family now amongst a spreading virus. However, I want to calmly acknowledge that the world is also facing a very real personal finance threat, one that could be far more impactful for most Americans than the virus itself (which I’m not taking lightly). Before we make rash decisions in a time of panic and hysteria, let’s examine some important headlines from the 2008 financial crisis and why those messages are so incredibly important right now.
A Different Trigger
Every decade or so, something comes along that, at least in the short-term, devastates financial markets. From December 2007-June 2009, now termed the Great Recession, the collapse of subprime mortgage lending practices and the subsequent meltdown of the housing market led to the collapse of stock prices, alarmingly high unemployment, and a very questionable future for the U.S. financial system and all who relied on those institutions.
Now the trigger is an unexpected global pandemic of the novel coronavirus. Global supply chains are severed, products can’t get to the shelf, and people either can’t or are reluctant to leave their homes to purchase products that may be available. Restaurants, bars, cafes, social venues, schools, gyms…everything is closed or closing. Most importantly, people who are loved by someone are sick or dying.
An Important Aside: My thoughts on this outbreak as it pertains to overall impact have evolved….a lot. We are taking these closings and orders for social distancing very seriously. We hope that you are doing the same. As with most things in life, this is much bigger than any one of us. So please, stay home as much as possible and protect your fellow man.
The sooner we are all on the same page, the sooner we put this behind us. Let’s get back to complaining about someone else’s dog poop in our trash bins again.
I Wasn’t an Investor in the 2008 Financial Crisis
First, let’s start with some full disclosure from the author here. I wasn’t an investor in 2008.
When things started to really go downhill in September of 2008, I was 24 years old, freshly enrolled in a graduate university program. I actually had a small 401(k) from a job the previous year. Stupidly, I cashed out the $800 balance in the summer of 2008 to partially fund my relocation from Oregon to Arizona. The money was something to spend, so I spent it. Whomp, whomp, whomp.
I began participating in another company 401(k) three years later, in January of 2011. By August of 2011, I was starting to tinker with a personal brokerage account. Honestly, I had no idea what I was doing.
Even in 2011, things were still rocky. I wondered then if I was investing at a time of false growth. Perhaps the market would fall again, I wondered. Would I be yet another victim of the outgoing Great Recession? Would I be another hopeless sap who threw his hard-earned money in the stock market?
So, I want to be crystal clear that I wasn’t successfully tested as an investor during the 2008 financial crisis. I didn’t have nerves of steel because I didn’t need them. I was living meagerly on teaching assistantship wages and federal loans. That income was relatively secure.
That said, I was very aware of the happenings in the world and how the events of the financial crisis were affecting Americans at large, including myself. After all, I would be facing the grim job market in 2009-2010, forcing my hand to move away from an uncertain future in academia (my dream career path) and embrace industry instead (not my dream).
(Related Post: Job Security: Our Catalyst to Financial Independence)
The Great Recession: Reliving in Real Time
From late 2007 to March of 2009, the S&P 500 lost approximately 50% of its value, the largest loss since the Great Depression. And on the way down, there were endless voices of “authority” proclaiming “no end in sight,” and repeating that “this time is different.”
Even though I wasn’t an investor, I remember clearly this messaging. I honestly can’t say that I wouldn’t have feared the worst and cashed out, locking in those paper losses. Since beginning this website, I’ve heard from several folks who told me that they lost their cool and sold somewhere along the way down.
Of course, when you are surrounded by voices of panic and consternation, how easy is it to believe that this time is different?!
One lesson I learned early on was that any investor in the stock market must don an iron shield from time to time. I was not tested as an investor in the Great Recession, but we are all being tested now.
We now know with the advantage of hindsight that the investor who stayed the course from 2007-early 2009 faired tremendously in the ensuing 11-year bull market run.
Let’s examine some headlines from major news institutions as the financial crisis unfolded. We’re particularly interested in the period from September, 2008—a period of financial infamy—to March of 2009, when stocks once again began their relentless climb. The bear market, different than but related to the recession, lasted from October 9, 2007 to March 9, 2009, with a loss in equity prices of approximately 50%.
(I googled many of these headlines, but I also found some other helpful sources here and here.)
Financial Crisis: September 2008 and “Too Big to Fail”
As you can see in the headlines below, by mid-September, 2008 the subprime mortgage lending practices were imploding, marked by the collapse of Lehman Brothers.
Bear Stearns, a major investment bank, had narrowly avoided bankruptcy by its sale to J.P. Morgan Chase in March of 2008. By September, it’s clear that all is not right in the world as it relates to major financial institutions. This is where things get scary.
“Lehman Collapse Sends Shockwaves Around the World,” The Times, September 16, 2008
“Mounting Fears Shake World Markets as Banking Giants Rush to Raise Capital,” WSJ, September 18, 2008
“Panic Grips Credit Markets,” Financial Times, September 18, 2008
“Worst Crisis Since ‘30s, with No End Yet in Sight,” Wall Street Journal, September 18, 2008
“A New Phase in Finance Crisis as Investors Run to Safety,” New York Times, September 18, 2008
Financial Crisis: 2008 Government Intervention
And just as we are seeing unfold in March of 2020, the government races to begin a financial rescue plan:
“Citing Grave Financial Threats, Officials Ready Massive Rescue,” Washington Post, September 19, 2008
“House Rejects Financial Rescue, Sending Stocks Plummeting,” Washington Post, September 30, 2008
“Historic Bailout Passes as Economy Slips Further.” Wall Street Journal, October 2, 2008
Financial Crisis: 2008-2009 Recession Deepens
By late 2008 and early 2009, the economy is a real pile. Sources of income are evaporating as businesses lay off employees, reduce hours, or fold completely. To make matters worse, the housing market is also falling sharply, and Americans are now burning the candle at three ends. Many folks have no income, are watching their savings and retirement accounts erode, and are now terrified to see their home equity being brutally slashed.
“U.S. Loses 533,000 Jobs in Biggest Drop Since 1974,” New York Times, December 5, 2008
“Housing Prices in 20 U.S. Cities Fall a Record 18.5%,” Bloomberg News, February 24, 2009
“Stocks Fall to Lowest Level Since 1997 as Dow Drops Below 6,800,” USA Today, March 2, 2009
“Job Losses Hint at Vast Remaking of Economy,” New York Times, March 6, 2009
“Global Economic Shock Worse Than Great Depression,” Huffington Post, May 8, 2009
“Financial Crisis is the Worst the World Has Ever Faced,” Daily Telegraph, October 7, 2011
Hindsight is 20/20
We all now know how the aftermath of the Great Recession played out.
Out of the ashes came the greatest bull market the world has ever seen, extending eleven years until the fall from grace in late February of this year. Thousands upon thousands of people were made into millionaires, some through prosperous business creation and others through simple saving and investment strategies.
Skyscrapers were built, the housing market exploded, and the economy prospered.
Those that took no action with their investments during the 2007-2009 financial crisis witnessed shocking losses on paper, up to half of their life savings. However, in the intervening years, those same individuals watched their accounts grow tremendously. The losses were only ephemeral.
Many others, understandably freaked out by the real-time headlines in those days, cashed out somewhere along the way down. Furthermore, they likely didn’t get back in the market until much later in the recovery. Those individuals realized perhaps incredible real losses, sealing the deal on what was only a paper loss until the sell order was finalized.
(Related Post: Fear: Here’s How It’s Holding You Back)
But couldn’t you imagine??? Week after week, month after month of terrible economic news. How strong can we be? The entire year of 2008 was basically one loss after another in terms of equity prices. Stare at that chart dude! It’s easy for me to understand how folks might have feared the worst and pulled the plug.
Bottom Line: Despite the terrible headlines and constant dread, the Great Recession led to the greatest bull market run of all time. Those who stayed the course faired tremendously. To time the market, we have to be lucky twice: once to get out at the market high, and again to get back in at the bottom. Almost always, both the market high and low are only known in hindsight.
The 2020 Financial Crisis?
Now, in seemingly a blink of an eye, we are all watching wealth being eroded at an alarming rate. As of the market close on Friday (3/20/20), the S&P 500 is 32% off its February 19 high of 3386 points. That’s 32% in a month! For those of us heavily invested in equities (right here!), we’ve lost in the range of 30% of our life savings! Repeat this five times: it’s only on paper.
It’s only on paper.
It’s only on paper.
It’s only on paper.
It’s only on paper.
It’s only on paper.
As I mentioned last week, if I was a betting man, I’d expect to see the unemployment numbers begin to rise sharply. This week brought a “staggering rise in unemployment claims.” The signs suggest the beginning of a contracting economy.
It’s only on paper.
This Will Hurt Until It Gets Better
Coronavirus aside (which is admittedly very hard to put aside), this is going to hurt for many Americans. Concerningly, 29% of American households have less than $1000 in savings. As income disappears where emergency funds don’t exist, real financial emergencies are already beginning to appear. Let’s not sugar-coat the reality. This sucks for all of us right now for different reasons.
And I’m going to go out on a limb and say that this situation is going to get worse before it gets better. Between the major blunder at the federal level in terms of readiness and testing, and the continued indifferent attitudes of individuals in society, virus cases will continue to rise in tandem with prolonged periods of lockdown.
But as we’re seeing elsewhere in the world (China and South Korea in particular), this situation will improve.
Ready Yourself for Bad News: This is a Temporary Condition
What seems like terror and an endless free-fall in the moment does end in time. This is starting to look a hell of a lot like 2008 again, but I feel resolved to withstand the pressure having closely studied the events of the Great Recession.
There will be a deluge of bad news coming down the pipe for many weeks and perhaps months to come. There will be voice after voice, headline after headline, proclaiming that this time is different. And it feels different, right!? This time it’s a virus!
It should be known that “this time” is always something different, or we wouldn’t have downturns at all. Downturns are almost always preceded by something unforeseen. An unforeseen trigger causes the very downturn and associated uncertainty. People panic, race for cash, and the stock market crashes. We’ve seen this many times before, but for different reasons.
Many people fear that risking the ride on an endless downturn can ruin them. With this logic, it must be better to get out while you can. What if there’s a world where the market goes to $0 and literally all is lost?
Let me offer you some “comfort” on that notion: In that world your money has no value. That truly is an “end of days” scenario, and folks, we are not living in that world. We simply aren’t. This ain’t no Mad Max.
It’s only on paper.
Bottom Line: Headlines will most likely be riddled with bad news in the coming weeks and perhaps months. Know that there is a historical precedent for this. Our society has weathered far worse, and we will weather this. Ride this out with us.
Until Next Time
Hang with us, won’t you?
We are not investing gurus, and we hold no crystal balls. We are regular people trying to make informed decisions based on historical events. I want this to be a forum of frankness and honesty. I’m going to let you know what we’re doing with our money, which is nothing.
The great tragedy here is the lack of formal education as it pertains to simple basics like emergency funds. Forget investing. The fact that we have to go out and self-educate to prevent a personal financial crisis deeply saddens me, and yet here we are. I can suggest that you hurry up and save, but if you have already lost your job (or are about to), there’s only so much that can be done now. To make matters worse, low-income earners will likely be adversely affected by the virus itself, forced to work in increasingly threatened conditions as it pertains to virus spread.
However, if you are one of the fortunate ones with investments and an emergency fund, we shall hunker down in preservation mode together.
My immediate suggestion is to take action on tracking your spending. I know you’ve been meaning to do it. Let’s make this a good learning opportunity and get the ball rolling on some good habits.
(Related Post: Personal Finance: Not Very Sexy, Huh?)
I might try and update this website more often, as much as I’m able to hang with rapidly-evolving current events. And my brand new truck was just destroyed by an absent-minded driver. More on that, of course. The point is that I might have some more time to write after all.
How are you feeling, really? Please let me know in the comments below. Strength in numbers. Oh, and wash your hands por favor!
Remember, the best laid plans mean nothing if you can’t take action today. Have questions? Need some feedback? Hit us up on the Contact page.
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Thanks guys, see you next week.
We talk about investing and investment strategies here. Please remember, we are not financial professionals and only speak from our own experiences. We are not responsible for any decisions you make from information gathered on this site. More over at the Disclaimer Page.
Thanks for the moral support here. We’ve gone through some difficult scenarios recently – this time is different, what if the market goes ALL the way down, bonds are going bust, etc. These are trying times watching our networth plummet! But we are going to ride it out and hope for the next bull market. It looks like it could be a while – hang in there everyone!
Mr CC, are you making any changes to your portfolio right now (re-allocating bonds/stock ratio, buying?) or you are sitting tight? Do you think money market funds and bonds are still safe?
You are very welcome. We’re all living through this day-by-day. Regarding what we’re doing: pretty much nothing. I was considering doing some tax-loss harvesting but we are regularly investing still, so I think we’d be in wash sale territory. I’m not rebalancing yet. We are already very heavy in stocks and bonds are falling too, so I don’t see much utility in that yet (for us).
We are buying. As I mentioned in the post from two weeks ago, we are using a DCA approach to invest my severance funds, which was a lucky little blessing before the shit hit the fan. We’ve slowed down the quantity, but are still buying VTSAX once weekly in small doses. We are sitting on 2-3 years worth of living expenses in cash right now, and debating if we go ahead and pay down the small remaining balance on our mortgage. As long as you have a good cash reserve, you have to believe that “buying the dip” will pan out in the end, as it always has before. Mrs. CC is still working, so we have cash coming in to back-fill our investments.
And yes, I have no reason to doubt the safety of money market funds. Unless you think there’s an end-of-days run on the banks and total collapse (I don’t, as you can see from what’s written above), savings accounts are fine. Obviously, bonds are still an investment and as such carry some degree of risk.
Hope this helps!
Excellent recap, Mr. Clipping Chains!
I was lucky enough to be a completely novice investor in 2008 and just kept contributing as much as I could to my 401k at work. I never looked at the balance because retirement was so far away.
I was also blessed that I was able to keep my good job during the whole thing. That was a blessing I didn’t even fully appreciate at the time. But with luck on my side of having a job, and no other investment plan than to keep putting money into my 401k, I came out of the 2008 crisis in good shape.
Today, I’m having to look back on that crisis, that I was mostly oblivious to, and learn the lessons that kept me moving forward. Ignore the noise. Keep investing. This is temporary. (Even if none us know how long “temporary” will be.)
Praying for everyone out there, especially those that will lose their jobs (as so many did in 2008) and hoping they will be able to find work and start rebuilding their lives sooner rather than later.
And to those that keep their jobs, be grateful, stick with your investing plan, and know that this is temporary.
Thank you very much for that perspective Aaron.
First of all, sorry to hear about your truck. I hope no one was hurt. It seems so long ago now, but it was only last November that we were talking about the stock market and investing. I’m going to present my contrarian view that buy-the-dip is the best strategy for the market we’re currently in. DCA has worked in the last 10 years because it has been the longest bull market we’ve had in history, but it is just not a good move in a bear market. Here’s why:
No one can predict how long this bear market will last. But unemployment rate will sky rocket above what we saw in the Great Recession, global supply chain is disrupted, the Russians want to crush the US shale oil industry, companies and individuals have huge amount of debt, and many small businesses (and large ones) will bankrupt. This is not going to be a V-shaped recovery like the beginning of 2019 that many were hoping for at the beginning of the crisis. We could be in a bear market for a few months, a year, two years, longer… who knows. But if you DCA your way down for who knows how long, it will take your investment much longer to get up above water again. If you invest $100 now and it falls by 50%, it will need to gain 100% just to get back to where it was. And they say the market takes the stairs on the way up but the elevator (or a cliff, like this year) down. Look at the S&P graph you posted. It took about a year for the S&P to fall from 1500 to the bottom, but it took roughly 4 years to get back to that same level. If we go back further to the dot-com bubble, the market did not make new highs until 13 years later. I’m not saying that the bear market will last that long this time, but can anyone definitely say it won’t? So in the worst case scenario, your money will be underwater in the market for a long time.
So why not start DCA after you see signs of market recovery? No one can time the bottom, and I’m not saying you need to time the bottom. Start investing only after you see the market coming back to life. What’s the risk in that? If you think about it logically, people who want to DCA all the way to the bottom really have the fear of missing the bottom. If you truly truly believe that market will go up in the long term, then what’s the harm of missing the bottom? Look at the graph of S&P again, even if you started investing one year after the market bottom, you still had 10 years of bull market.
Put it this way, the worst case scenario of not DCA for a year may be that you’ll miss investing at the bottom if the market recovered in less than a year; the worst case scenario of DCA now is that market will keep tanking for who knows how long, and the money you’ve invested will take even longer to get back to its present day value. The latter is definitely the more risky move.
DCA worked long before this bull-market. It’s proven to work, over the long run, in all market conditions for investors with a long-term investing horizon. It’s an investing strategy that existed decades upon decades before the Great Recession. I first came upon the subject written in a book in the 60s and 70s. This is not a new concept since 2008.
If you own stocks right now, you’ve lost money. However, with my $100 I can buy at least 30% more shares than I could in early February. The name of the game in investing is increasing the overall number of shares that you own. Yes, I very well understand that I may continue to temporarily lose on every weekly investment I make, but there’s no denying that I’m buying shares on discount.
My understanding from what you are saying is that it’s bad to invest right now, but it was fine to be investing when the market was at the top! How can that be? If I bought shares at the top, think about how long it’s going to take to make a return on that investment! Of course, each investment we make could continue to lose money, but I will inevitably make a return on that investment much sooner than any shares I bought in early February. Make sense?
When this market inevitably rebounds, I will have many more shares as a nucleus for continued growth. The share price will grow, and I will be happy for our decision.
The whole point of this post is to recognize that despite how bad things looked in 2008 (or even during the Great Depression), good times prevailed. Unless you believe the market will never recover from this point, A DCA approach is a fine approach. What you are advocating for is essentially market timing. As long as I have cash, I will invest in regular increments, in all market conditions. But you do you. I’m not a financial advisor, just a guy with a laptop 😉
Just presenting a contrarian point of view, that is all. People think market timing is a bad thing, but I don’t think so if done with a set plan and without emotions. You have your plans and you’re sticking to it, props to you. I just wanted to share what I believe will work (as I shared with you in November), but of course ultimately it’s up to you. I’m not a financial advisor either, just a friend who wants to see you do well in your retirement.
To each their own. I’m certainly not doing anything against the grain when it comes to long-term investing.
But regarding each other’s retirement plans, just remember that market timing requires being lucky twice. It’s very difficult to have a plan on what almost certainly requires that kind of good futune.
Just a question: What criteria will you use to say for certain that we are in a recovery? Bear in mind (sorry for the pun), that when I started investing in 2011 (two YEARS after the bottom!) we were in the midst of a correction and the news was warning that we could dip back into a recession. Also, did you cash out your investments before February 19, recognizing the high before it occurred?
That’s why DCA is a solid choice and that’s why I keep repeating that hindsight is 20/20. Only with passing time can we recognize market highs and lows.
If you go back to the email exchange we had in Nov, your questions were already answered in those emails. It’s not purely about luck, but looking at probabilities and analyzing things like fundamentals and technicals. I’m just scratching the surface as I learn more about trading (which is different than investing), but after a while even I started to recognize some of the patterns.
For example, I think that 2180 is an important support level in the S&P. It’s the level that the S&P was trading in 2016 for almost 1.5 years. The S&P just tested this level yesterday, if this level can hold, then we may see a short term bounce in the S&P for a few days, even up to a week. There has been too much selling in the last few weeks, but volume is decreasing and sellers are getting exhausted. Once we see a bounce, some will think this is the bottom and jump in to buy. And then we will see another round of selling that has the potential to push the S&P down to around 1800.
Do I know this for certain? No. But based on what I’ve learned in the last few months, I think this is fairly high probability scenario.
Well, this is turning in to its own blog post! I guess I’ll repeat what I said back in November. Market timing, as multiple studies have shown, generally results in underperforming the market as a whole, and I think what you are suggesting is market timing. If you can devise a strategy to pick the top and bottom of each correction or bear market over a multi-decade investing horizon, you will be a very wealthy man! But as I keep pointing out, I’ve yet to come across any reliable strategy that doesn’t in some way miss either big cap gains on the way to the peak or huge buying opportunities at the bottom. Too much luck.
In my years of study (not a scholar on the matter), here is the conclusion I’ve come to regarding what investment strategies work and don’t work well.
1. Lump Sum Investing. Performs best, but is psychologically demanding to invest large sums at once.
2. Dollar-Cost-Averaging. The sweet spot. I actually do a hybrid version by adding more investments when markets are down, buying more shares on discount (already discussed). Otherwise we buy equities once per month, the same dollar amount, every single month. Always. With any cash windfalls, I lump-sum them.
3. Market Timing. Those who participate generally underperform the market as a whole and were better off with either of the passive, conveniently lazy choices outlined above.
If you can show me a study that refutes what is written above, you will have my attention. Otherwise, I guess we have to agree to disagree. Friendly, of course. 😉
This is were long term investors are wrong. It does not mean you have to be lucky twice. You do not have to sell at the top and buy at the bottom. When it is obvious such as in the case of a pandemic, everyone and their dog knows the market will tank, so what if you miss the first 15% down, you sell some of your investments and start to buy back in at 20/25/30/%%% down and who cares if at the bottom you missed the 10% one day gain at the bottom. You write down the price you sold at and you make sure that you buy back in at a price below that. Now if you sold once it hits 30% down, then yes you are wrong and that is a bad thing. Market timing does not have to be perfect, you just have to make sure you get back in. Also if you miss out on 5-10% gains by sitting on your cash but that allowed you to sleep during a meltdown that is not such a bad thing either, Warren Buffet sits on piles of cash.
Rick, to each their own. There are many way to invest. That said, yes, you do have to be lucky twice for market timing to work — and that’s just one bear market! Sure, there’s some margin (i.e. you don’t have to hit the exact market low and market high). However, the farther you are from hitting the high or low, the more you stand to lose or the more your gains are diminished. There’s just a massive, heaping pile of research showing that active, market-timing investors generally underperform the market. And if this is your style, you have to reasonably time every single bear market for decades. As per how markets relate to a virus (and more on why market timing is problematic for the vast majority of investors), I found this article particularly relevant to this discussion: https://www.ifa.com/articles/market-timing_more_evidence_really_doesnt_work/
But tell me, what’s wrong with matching market performance when it’s proven so incredibly difficult to beat it? Have you outperformed the market over 20 or more years with this strategy?
Excellent reply. I exited the casino at a 17.5% loss after maximizing 401k contributions for 30 years.
My loss is REALIZED!
I’ll await a recovery at age 59.
Thank You
Hello Mr Chains
The majority of the comments here seem a bit odd to me. I agree with the overall sentiment of your post and the DCA strategy.
2-3 years of living expenses in cash seems like a lot to have on hand. At current interest rates, its hard to justify paying off your mortgage when you can just plunge more into equities and get stocks on sale.
I made the choice to put half my cash in equities when the market fell as a lump sum. And I’m working my ass off to put more in. This time calls for a more aggressive investing approach.
Thanks for the comment Umer. Obviously we’re in agreement. Mrs. CC is more risk-averse, so she wanted more cash than I would prefer. Also, a topic for another post: we went ahead and paid off our mortgage. We were in striking distance, and it made sense to eliminate that expense if we were going to enter a phase of no W2 income. FWIW I think your strategy will probably make more money, but there’s something to be said about the amazing feeling of living debt free!