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2008 was (still is?) the worst stock market and economic period I have had to live through, and I don’t think I am faring that poorly. I still have a good job in a foreign company as an expat, my stock portfolio is not down to zero, I sold out of Citigroup (even if it was too late), and my wife and kids still love me! However, I think that there is a HUGE amount of learning that we can all do as a result of this experience. Let’s face it – the old adage that you learn from your mistakes holds especially true right now![ad#tdg-embedded]
I have done a lot of thinking over the past few weeks and while reading the message boards over at Bogleheads, Financial Webring, and The Motley Fool have come up with my own list of top learnings that I have taken away during markets such as this. This is my list, and applies to me but I would suggest that you have some that are similar and some that are different. You may even not agree with my learnings! That is cool and part of the process. Please use the comments to add learnings, debate some of mine, or comment on how you approached the market crash. I think we can all learn a lot from each other.
Here are the top 6 things I learned from the market crash of 2008:
1. Buy and hold works, but requires a long time to play out
Five years is not enough to let a portfolio do its work. I think as investors we all got used to a steadily rising market and began thinking too short term. Buy and hold requires, in my opinion, at least 10 years to do its work. I think 20 years may even be better.
2. Buy and hold really means buy and monitor
There is no such things as buy and hold, especially as the owner of individual stocks. Buy and hold will work with index funds and truly passive portfolios, but if you even own one stock in your account then it is crucial that you monitor that stock.
3. Dividend cuts really do spell trouble
I got out of Citigroup way too late. Right now, the stock is trading at slightly above $3. I sold at around $16 which I consider myself lucky however the damage to my portfolio was still dramatic. In the past, I had been burned by selling a stock that cut its dividend only to see the stock recover greatly (i.e. Merck). However, the growth of that stock has not been nearly as good as more stable dividend payers such as Wal-Mart or Johnson & Johnson. Dividend cuts in the end spell real trouble for a company.
4. It is alright to sell a stock
I recently updated my investing code to allow for sells because of dividend cuts. This is a result of the learnings #2 and #3 above. You always have to monitor your stocks, and if they take an action that spells real trouble (a la dividend cuts) then get out as soon as possible. Do not wait on hope.
5. Buy on the way down, but with a huge caveat
Dollar cost averaging into stocks as the get sucked down by a declining market is one thing. That is good investment activity. Buying a stock on the way down that is in financial trouble is gambling. Again, I go back to Citigroup as the falling knife. Be very strategic about buying declining stocks – only buy the strongest ones.
6. Never watch CNBC
Watching CNBC, especially in down markets, will only feed the dark side. These guys are total jackasses and flip their positions on a daily basis. They get eyeballs by feeding off of fear which leads to stupid decisions. A buy and hold dividend investor will be more successful by not watching CNBC.
Those are mine, for now. Who knows if this stuff is over but heres hoping my diversified asset allocation will provide me with some protection.
Great post! I too have learned my best lessons from the school of hard knocks. When you have battle scars, you don’t forget the lesson.
Best Wishes,
D4L
On #5 – I’ve never believed in dollar cost averaging – it’s chasing good money after bad. Either sell and claim the loss or hang on and start buying again when the stock(s) start going back up.
Cheers,
Brad
I had a good laugh at the CNBC comment. My perception has been that this market was better received than the tech bust – but that’s just my experiences. I remember people losing their life savings in that euphoria while I watched, made notes & learnt from all the chaos that ensued.
This year hasn’t been kind to most equity investors, but my RSP is above water YTD and my CDN portfolio is only down in the low double digits. Dividend income is up and I own a group of very high quality companies.
Patience is likely the one thing I’ve learnt about the most this year….because stocks have stayed cheap for a while & may still do so for 2009.
I agree with you about the ‘buy and monitor’
Every investment has its day in the sun and at some point, could turn for the worst.
This crash is really going to change my portfolio strategy in the coming years.
1. Buy and hold works, but requires a long time to play out
Five years is not enough to let a portfolio do its work. I think as investors we all got used to a steadily rising market and began thinking too short term. Buy and hold requires, in my opinion, at least 10 years to do its work. I think 20 years may even be better.
This is kind of general but a lot of the bubble in the past 20 or so years has been from the financial industry boasting stocks return 8-10% a year. This is the beef I have with the industry. It has almost been like the early 1900s hasn’t it. 8% a year but hey average person there is risk but this asset class always outperforms.
I don’t di-“worsify” with index funds or anything but Yeah 20 yrs is better bc that’s what we could be looking at. from the 60s to the 80s the market was flat and it definitely wasn’t as bad as this. This is the flaw of buy and hold. You’re either a stock picker and great at selling at high valuations or your in the red. I guess dividends can make up for some of the fall. I’ve been learning day trading lately and with the VIX at 50 its even better. I’m getting 10-20 percent a day regularly lately. When stocks swing 15-30% a day and you have the most volatile on your watchlist its like shooting fish in a barrel if you pick the best set-ups
“It is alright to sell a stock”
people are going to have to sell winners bc the market could be up until March then fall for a year then be up. totally range bound for years
I totally agree with your points, except on number 6. I do watch CNBC mainly for entertainment purposes. I do not get much value from them however 🙂
I totally agree that even a buy and hold investor should consider selling their biggest dissapointers. Without a clear exit strategy, your dividend portfolio might not perform as well as the benchmarks.
Good list. Buy and Hold works but you have to set a price point for when you will exit a stock position. I am convinced that CNBC caters to market timers and traders because they refer to long term as 6 months from now. All of the news is gloomy and panic filled to produce ratings.
I went to D.U.M.B. also. CNBC is no good for us buy & hold investors. they feed only fear…. Watch Fox Business instead…
CNBC has a great entertainment value, particularly the nut case Jim Cramer. Isn’t it funny that he rolls on the floor, jumps in air, makes noises, rolls on sleeves, etc etc., and we think he is teaching money making tips. Remember he brings in his old buddy bob steele to say all good things about wachovia, and 2 two weeks later… company needs lifeline….. Believe me it is lots of fun thinking about sky is falling scenarios.
The first thing I learned when I was researching stock market investing what that there are two types on investors.
Long term, and flip investors. I decided immediately that I wanted to be the first, because the second is just not the type of game I want to play.
I have a stock app on my phone, and I watch them everyday to see what they’re doing, but I hold my position stubbornly.