Tuesday, March 9, 2010

Lessons I Learned from Financial Armageddon

Today marks the one year anniversary of the market lows experienced during the global financial meltdown.  That day the S&P 500 closed at 676.  Today it stands at 1140.  I would less than honest if I didn't admit I felt like the world was ending, and that everything I'd worked so hard for was going to vanish into thin air.  At the bottom, I literally felt like throwing up every time I looked at my portfolio.  But I resisted the urge to sell in panic like so many of my friends.  I'd been investing since before the market crash of 1987 and knew instinctively the long term trend for equities as a whole is up.  Investing is an act of faith that tomorrow will be better than today, but that faith is always tested by bear markets.  I didn't sell anything, but stuck to my asset allocation model, keep my discipline.  And this made all the difference.

I think all long-term investors should keep a historical perspective on the markets.  They should especially go back and review those periods in history where turmoil takes hold and the markets veer irrationally out of control.  Looking back over the past year, reinforced some lessons that bear repeating:
  1. People aren't as risk tolerant as they think.  Design your portfolio so you can emotionally withstand the inevitable down periods without panicing.
  2. Performance chasing, just like envy, is an emotion that is alive and well in the investment community.  It is the hype that Wall Street is built on.
  3. Common sense goes down the drain when it comes to investing. Who wouldn't jump at paying $1 dollar for a hamburger that previously cost $2?  But how many run away from buying the S&P 500 at 670 when they were buying with both fists at 1200.  Or has Warren Buffett recently said, and I paraphrase, "When it's raining money, bring a bucket instead of a thimble."
  4. Seers and forecasters have no special insight and are wrong most of the time.  Yet people will pay a lot of money for expert advice (magazines, newsletters, investment accounts).  Like a stopped clock, they will be right every now and then, and they will be anointed gurus.  Hope lives eternal.
  5. What we learned previously is easily forgotten when the greed cycle kicks back in.
My own reaction to this most recent financial Armageddon was to tough it out and place my faith in the long-term upward trend of economic growth and human improvement.  My shortcoming during the crisis was not keeping a level head and buying more at the low points.  May I have a more wisdom during the next crisis to seize that golden opportunity.

No comments:

Post a Comment