Two weeks ago, most of us had never heard that phrase and had no idea what it meant. So much has changed so fast.
We are all aware of how unprecedented these times are. But as Mark Twain once famously said, “History may not repeat itself, but it sure does rhyme.”
I’ve had a lot of time this week to think about how this time, and specifically the stock and bond market action, is similar and different from other disruptions. I was hired into this business in the late fall of 2002, right as we were trying to recover from the tech bubble burst and Sept. 11. The Financial Crisis of the last decade is one that many want to forget, but was especially impressive on me, as I got married in the midst of it. This makes my third substantial market disruption and I’ve learned a lot.
One lesson learned is that while it feels like these disruptions will last forever and be impossible to recover from, they are usually fairly brief in historical context and recovery typically happens quicker than we expect at the point of the worse despair.
The Tech Bubble started to unravel around the Y2K scare. That led to a rough 2000 as technology companies that were expected to be the “new economy” failed one after another. That’s when we were reminded that making a profit was important for companies, regardless of industry. By 2001, we started to get hope that the worse was behind us as the markets went from free fall to swings up as well as down. Until that fateful Tuesday in September.
After September 11th, markets took another quick fall that saw a quick rebound. Then, by early 2002, the reality of the economic impact of the terrorist attack and our reaction to it caused another substantial drop in stock values as we saw companies fail, unemployment go up, and a general malaise in the economy.
The stock markets generally bottomed in the 3rd quarter of 2002, just as I got in the business and started studying for my exams. People told me I was crazy, as who would want to invest right now. I was young and naive, so I ignored them. I thought that this was exactly when people needed professional help. Another lesson that I learned during this time was that after a traumatic financial disruption, people will make decisions with their heart, largely out of fear, even when the history and statistics tell them something different.
This would have been a great time to tilt an investment allocation toward more stocks, and more international investments. But no one wanted to do that, because they were scared due what they had just lived through. I was too young and inexperienced to guide them, so I towed the company line and put clients in what I could get them to “buy”. At the time, it was a lot of individual bonds. There were many municipal bonds and corporate bonds, but some of them were mortgage bonds or issued by financial institutions like Bears Stearns and Lehman Brothers.
The next five years saw the stock market rebound back to recover all of its losses.
So what’s the take away?
First, while this feels like something we’ve never experienced, in a lot of ways we’ve been here before. You can always find a crisis somewhere. And every now and then, a small local or regional issue becomes a global scare.
Second, when it comes to investing, especially in a crisis, it rarely pays to react due to your emotions of greed and fear. Many invested in tech companies in the late 90’s out of greed, because they didn’t want to miss out. Then they sold in 2000 or 2001, out of fear, locking in their losses rather than recouping them. If they bought “safe” investments in 2002, like bonds, they probably did ok but missed out on the rebound of stocks over the next five years. The better strategy is to have a well diversified portfolio of stocks and bonds, with a blend to fit your goals and risk profile. And stick with it! Past performance is not indicative of future results. Results WILL vary.
And lastly, seek the advice and counsel of someone who has been through this before. Difficult times have a way of teaching lessons that good times can’t.
Next week I plan to write about the 2007-08 Financial Crisis and the lessons learned there. But, who knows - things could be very different by then.
Stay safe, call your friends and family, and wash your hands. And keep your Social Distance. This thing is likely to get worse before it gets better. But, that’s ok. We’ll get through it!