One day last week, after watching the Dow drop over 500 points, I headed to a dinner party, where I was asked by several people to perform a party trick that I’m all too often requested; to get out my crystal ball.
“Do you think the market is headed for another big downturn like 2008?” one of my new acquaintances prodded after learning of my profession. Instead of the long-winded CNBC re-run prediction that most advisors would have given, I provided a blunt and unexpected answer, “We can only hope.”
Judging by the offended look on his face, I’m fairly certain he thought I was trying to shake him with a wise-guy answer so I could continue what likely appeared to be a one-man Brie cheese-eating contest. After realizing that I wasn’t trying to give him the slip so I could enjoy my high calorie dairy treats in solitude, he gave me a puzzled look as if to say, “Are you nuts?”
After all, who on earth wants to open their account to see that since last month’s statement they have lost enough money to buy a car or nice vacation? No one likes to lose money… but that’s the problem. Human nature kicks in and our fear of loss causes us to panic; which may have been beneficial as cavemen, but when it comes to investing, anxiety rarely serves anyone well.
Take the financial crisis seven years ago. Plenty of people panicked and sold out when they saw their 401k balances cut in half, locking in their losses. On the other hand, smart investors did exactly the opposite. They didn’t see it as a crisis, but as a half-price buying opportunity. In an interview with Fortune magazine, Warren Buffet nailed it when he said:
“I’m going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up in price, we weep. For most people, it’s the same with everything in life they will be buying — except stocks. When stocks go down and you can get more for your money, people don’t like them anymore.”
The intangible and abstract nature of stocks can make this concept a little hard to wrap your head around, but the same thing also applies to real estate. Imagine what your financial situation might look like today if you had a time machine and could go back to 2009 to snatch up as many foreclosures in your neighborhood as you could get your hands on?
At this point in the cocktail party I could feel myself entering into Southern preacher territory (this won’t surprise those of you who know my propensity to “geek out” about investments) when one of my parishioners interrupted with what they thought would rain on my parade – “But what about China? What about Greece? What about oil prices? What about…”
The fact of the matter is that in the decades gone by, there have been very few times when there hasn’t been something going on somewhere in the world for the media to point to as a potential reason for economic Armageddon. For instance, consider a small sampling of the ammunition used by doomsayers over the last twenty years:
- The tech bubble
- Three major wars
- Enron and other account scandals
- The Asian Contagion (Asia’s financial crisis in 1997)
- The peak oil crisis in 2003
- Auto industry bankruptcies
- The Russian financial crisis
- The subprime mortgage crisis & great recession
If you actually did have a crystal ball at the start of 1994 showing you a highlight reel of the coming world events, I’m guessing that you wouldn’t have rushed out to invest, but had you done so (and managed to ignore the “experts” and headlines along the way), a well diversified portfolio would have seen an average return in the neighborhood of 10% a year (take a look at THIS article if you want to learn more about how the market has done over long periods).
If you had continued to save over time, stashing away a little extra when everyone else ran for the hills, you would have done even better than that. And sure, some folks can’t afford to wait for the market to recover from a 50% loss, which is exactly why they shouldn’t have all (or anything near close to all) of their money in stocks.
So the next time your brother-in-law or Jim Cramer yells that the sky is falling, channel your inner Warren Buffet, flip your perspective and remember that the market doesn’t have “bad” days… it has blue-light specials!
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