A Decade Later: 3 Investing Lessons of the Great Recession

Ten years ago we experienced a global crisis that began with the subprime mortgage market and spread to the banks and our investment portfolios. You probably remember that jaw-dropping decline well; I certainly do. From its high of 14,000 points in October 2007, the Dow Jones Industrial had bottomed out at 6,600 by March 2009.

Perhaps it seems odd to bring up that period, even though this year marks the 10-year anniversary. Stocks are amazingly robust right now, and the indexes seem to hit new highs nearly every day. Yet this sustained bull market makes an opportune time to revisit the period. Just as now, markets were climbing–until they dropped.

I don’t make forecasts, but it is safe to say that the market will suffer a downturn again. When and why no one knows, no matter what the media “gurus” claim. But markets rise and fall, and during this sustained upswing, it can be wise to heed three lessons from the Great Recession.

Lesson 1: Don’t Let Emotions Rule Your Decisions

The euphoria at the top of the market and the panic at the bottom–investors who get swept up in either emotion can be prone to decisions that set them back financially. You might buy stocks at their highest price, or you may sell at their lowest. Either way, you can lose money.

Investors who would have panicked and sold their investments when the market bottomed out in 2009 lost out on the investing opportunities that coincided with the market’s climb again.

So strive for a rational approach to investing, and if you are having trouble managing the emotional aspects (many people do), you might consider working with a fee-only financial advisor who can provide a calm presence for the long term.

Which leads us to Lesson 2 …

Lesson 2: Eschew the Short Term

Investment portfolios generally work best over time because it is time that allows investors to earn the returns they seek. That is why a long-term investment perspective generally works best.

Consider these statistics from Fidelity Investments: On average, those who contributed to their 401(k) plans over the last 10 years saw their account balance triple. So an account balance that was $115,000 in June 2007 rose, on average, to $315,000 by June 2017.

Lesson 3: Have a Plan

It is my experience that investors who have a plan are more able to stick out rough markets. That’s because their plan has been tailored to them and their goals for life. In addition, a good investment plan will factor in your risk tolerance.

By definition, investing is about taking on risk. But if you have taken on too much risk, you might panic when your equities lose value. In the example above, the $115,000 account balance would have dropped to $85,000 in early 2009. If that makes you sick, then your tolerance for risk may be low, and your investment plan should reflect it. And if the drop doesn’t faze you, then you might be partial to more risk.

Either way, a talk with an advisor can help give you a plan–a road map, if you will–through all kinds of markets, even one like the Great Recession, while you strive toward your goals.