What I learned from the 2009 S&P500 Drop:
In the last year I've re-read a few books by Malcolm Gladwell. During a recent interview I watched on Youtube, he discussed the importance of revisiting the assumptions you had years ago, are they still valid? This has pushed me to think about the turbulent markets from 2007 - 2009. How will I react to this level market instability?
With the recent massive gains in the markets in 2019 (greater than 30%), I keep thinking back to one of the steepest drops in the S&P500 that started in 2007. In November of 2007, the S&P500 was sitting at around 1,450- it then dropped all the way down to 683 within two years. Thankfully today it's up over 380% from that low point in 2009 at around 3,300. Yes, I am cherry picking the high and lows to make a point.
Fortunately in 2007 - 2009 I was not obsessed with monitoring every aspect of my finances the way I am today. I didn't have the personal capital app back then, so managing my investments was more of a painstaking manual quarterly exercise. Today you can look at all of your finances on your phone. Click here if you haven't yet downloaded personal capital, I believe you will make $20 dollars if you do!
I had already invested heavily in retirement and post tax brokerage accounts when I started my working career two decades earlier, and I been an active real estate investor and house hacker dating back to the 1980's. Read here about my house hacking activities that helped me learn about business and save money:
Ignorance is Bliss:
Yes, I saw the 2009 S&P 500 massive concrete balloon drop, but I remembered thinking that I was also leveraged into real estate, and my corporate career was going really well- so why worry about a short term drop in 500 US companies, they always bounce back. Perhaps ignorance is bliss, as I kept investing regularly, and I even increased positions in market indexes and individual stocks during this market downturn. I hadn't yet thought about early retirement, as I really enjoyed my work- I just assumed I would think about retirement when I hit my mid- 60's. That's what everyone tells you to do.
The good news was that I simply was not impacted negatively by the massive housing crisis, I read about all of the foreclosures, and terrible financial outcomes for so many people who lost their homes. Whether you can blame the greedy unregulated bankers (although none were held responsible) or the over-leveraged, uniformed and unqualified buyers who took the leap on home ownership and lost everything- the results were the same, many lost their homes and their jobs.
Too Busy to Worry:
One good thing about working a very demanding and busy career- you are often too busy to worry about things outside of your direct world. I also realize that luck had a lot to do with my success. The harder you do work, the easier it is for luck to find you, as this is what must have happened to me.
One reason I was not impacted by the housing crash in the late 2000's was that I had aggressively paid down my primary residence, and it's value doubled in the seven years of ownership. I understood that paying off debt of any kind produced a really good return. For instance, paying off student loans for most is a one time thing. Once they are paid off, you will immediately have more money to put into other investments. For this reason I wiped out as much debt as I could while balancing my investment input every month.
Too Many BMW's:
Many of my peers however considered me completely crazy back then. To give you an example, I had a colleague who received generous tech company stock options. He used the money to buy eight BMW's, and he even traveled to Germany to drive his new cars on the Autobahn before shipping them home. This colleague later told me that he admired my home, and wished he had bought a larger asset instead of so many cars that quickly dropped in value (a.k.a. liabilities).
The Next Black Swan:
I have also been thinking quite a bit lately about how I will react when the next significant market correction occurs. Fortunately I have built up enough assets in non equities so that the concern of a S&P500 50% drop is warranted, but it certainly wouldn't sink me, although it would hurt if I plan on selling equities that year. Whether you believe in the perpetual 7% growth of the markets, or alternatively a black swan doomsday scenario or pandemic that will make the 1929 crash look like a picnic- you simply cannot anticipate future market returns. My investing strategy and solution has always remained simple: Invest early and often in multiple areas, including real estate and other equity alternatives to mitigate the risk of another significant longer term market drop.
Optimist or Doomsday:
If you believe that a new significant market drop will create a new opportunity for you in terms of discounted markets, then you are an optimist, and if you are correct you will certainly benefit from a down market. If you panic during the next market correction and withdraw your positions as you prepare for the apocalypse of unprecedented market downturns, then if you are correct you will maintain fewer losses assuming the market never rebounds in your lifetime.
What Can You Do:
Neither of these above scenarios sound good. I believe a better approach is to assume that markets will continue to fluctuate. Therefore you should setup allocations and only invest the amounts in markets that enable you to sleep comfortably. That's it, just be prepared for each scenario without being greedy. Yes, this level of clarity is easier to obtain when your own portfolio of assets includes non-market investments such as real estate.
I've lived through really high interest rates, low market returns and now a crazy bull market that continues to defy gravity. All of these experiences taught me a key lesson mentioned previously- No one predicts the markets, but everyone can plan for market oddities to cover these fluctuations. I have another advantage or disadvantage depending on your perspective. Being in my mid-50's means that I only have X amount of years left to live to enjoy my assets, so my investing horizon has a shorter term. Younger investors who naturally have X + N years left to enjoy their assets should think longer term and enjoy the fact that they can and will watch their investments for many years to come.
Note that I am not a financial or legal professional, nor am I licensed to sell securities, or any other financial instruments. Given this statement, I strongly recommend that you consider this blog as entertainment value. Although, I sincerely hope that I can motivate you to learn to build your own financial knowledge and wealth.
Copyright © 2020 Financial Sombrero - All Rights Reserved.
Manage your net-worth, don't let others fail to...