Jon and I didn’t start thinking seriously about investing until after our wedding in October, 2007. You’ve probably heard that month mentioned a lot lately in the news, and it’s not because everyone’s excited about our 1.5 year anniversary. No, if you’ve heard a newscaster mention “October, 2007,” it was probably followed by the words, “When the market hit its peak.”
That’s right: we started investing when the market hit a level it probably won’t reach for another ten years. We put the bulk of our money in the market in the beginning of 2008, when stocks were down a little bit, but not that much. So when people say they have seen 10 years of gains wiped out in the recent collapse, we respond, “What is this mythical creature, the ‘investment gain’?”
But there is one good thing to come from the market’s slide. We’ve learned a lesson which is probably good to learn young: investing in individual stocks is a colossal gamble.
What did we know about Bank of America when we bought it at $42, then again at $6? What did we know about GE when we bought it at $32, and again at $28, and again at $17? For that matter, what did we know about Visa when we bought it at $62 and sold at $83? Why did we think we knew more than the market? Even when we have done well, it has been pure luck.
In the last week or so, I feel as though Jon and I have been trying to talk ourselves down off the cliff of investing in individual stocks. “Our problem is we invested in companies we didn’t know much about,” he’ll say. “But what can we really know?” I’ll respond. “Maybe we buy shares in a company, and it turns out the whole company is a colossal fraud. We have no clue.” Or he’ll say, “Our problem is that we listened to other people. We shouldn’t have taken their advice.” But our own advice isn’t any better.
This is a tough lesson to learn. No matter how much money we have lost, we still feel compelled to buy individual stocks. I think it is the same thing that compels us to buy new clothes or a new gadget. Shopping, even for stocks, is fun.
So what lessons have I learned from the stock market collapse? Here they are, along with my assessment of how likely I am to actually take these lessons to heart. It’s on a scale of 1 to 10; the lessons I’ve truly learned are a 10.
Don’t sell just because something has declined in value. I bought about $500 of EDD, an emerging market debt fund that lost over 80 percent. I decided to get rid of it; I just didn’t want to look at it in my portfolio. But here’s the problem: I had been collecting dividends, and reinvesting them by buying more EDD shares. As a result, instead of owning 16 shares, I owned 16.233465 or something like that. I couldn’t sell the fractional share, so it’s still there in my portfolio: .233465 shares, down 85 percent. It stares at me in the face, telling me how stupid I am. Truly Learned Score: 9.
Don’t buy just because something has declined in value. In other words, don’t make a “Hail Mary” pass. If a stock falls in price, don’t buy more out of an emotional need to reduce that negative return number in your portfolio. Truly Learned Score: 8.
The market knows more than you. If a fund or company has a dividend that looks too good to be true, it probably is. We bought GE because we were seduced by the 4 percent dividend yield. But the high yield indicated that investors expected GE to cut the dividend. And what do you know. They were right. Truly Learned Score: 5.
Don’t worry about any of this. It won’t matter at all when you only invest in index funds. There is no smarter investment strategy than that. I should record myself saying this and listen to it over and over while I sleep. Truly Learned Score: 3.
Buy real estate. Sure, it can decline in value, but usually it won’t drop as dramatically as the stock market. Thus, real estate can be a hedge against a market collapse. Truly Learned Score: 7.
What lessons have you learned from the market’s collapse?
4 Comments
March 7, 2009 at 8:31 pm
This collapse is both just like events that have happened before and not like those events. No one is really sure what will work. Not “the best minds of my generation,” or anyone else’s generation either. I am really glad we own our building with two rental units. And, in retrospect, it was always good for us that we had a rental unit even when we lived there.
I’ve learned things like, when I thought to myself, “How can these housing prices just keep going up and up and up, how is that possible?” I was right but didn’t know it.
I thought somehow that Franklin Roosevelt and his era had fixed all this so it wouldn’t happen again, but I was wrong.
My thinking now is that I would never put any but a very small amount of my money in something risky in the future. Likelihood of following through on that thought: 5.
May 24, 2009 at 9:38 pm
Michele, FDR and his era did fix all this, with the Glass-Steagal Act. It said that banks, investment houses, and insurance companies had to stick to making money their own way, and stay out of each others’ business.
It worked fine until the nineties, when the bank/investment/insurance lobbyists said “Let us make nifty deals and swap money around in ways that are currently illegal! We would create great synergies and make so much more money!” The Republican-controlled Congress listened to them and repealed Glass-Steagal, and they did make money …for a while, by trashing the national economy.
That was the bubble. This is the aftermath. If we’d kept Glass-Steagal, it wouldn’t have happened.
March 10, 2009 at 11:39 pm
[...] finance blog roundup Jump to Comments Thanks to Stock Trading To Go for including my post on five lessons from the stock market collapse in the latest Carnival of Personal Finance. Here are a couple other posts I liked this [...]
June 4, 2009 at 8:22 am
OHH Great post!! I just add this to my bookmarks. Thank You ^_^