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Friday thoughts - Social distancing part 2

Last week, I wrote about the lessons I learned coming out of the Tech Bubble Burst / September 11th recession. This week, I’ll follow up with lessons from the Financial Crisis. 

After the recession of 2000-02, I was new to the business and sold clients what they were interested in investing in - largely lower risk investments like bonds and dividend paying stocks. Many of the bonds that were available were mortgage bonds issued by Fannie Mae and Freddie Mac or bonds issued by banks and utilities. 

Over the next five years, markets calmed down and we, as a society, took advantage of the low interest rates. Americans bought homes, companies issued new debt, and the world hummed along. Until it didn’t anymore. 

By late 2006, cracks began to surface in the mortgage bond market. Some mortgage funds started to see an increase in defaults. By the summer of 2007, there were Wall Street funds that were beginning to fail due to too much of this bad debt and no where to sell it. That roiled the stock markets and we saw losses begin. In March of 2008 the investment bank Bear Stearns needed a bailout from the Federal Reserve Bank of New York and was sold to JPMorgan Chase. Things continued to get worse over the summer culminating in the failure of Lehman Brothers Bank in September and the passage of the $700 Billion Troubled Asset Relief Program (TARP) in early October. 

The way that the financial crisis unfolded reminds me of a line from Earnest Hemingways “The Sun Also Rises” - “How did you go bankrupt?” Bill asked. “Two ways,” Mike said, “Gradually, then suddenly.” 

The first lesson from the Financial Crisis is that bad times can last longer than you expect. The entire fiasco took two years to play out. There were several times in those two years that it seemed to be getting better. Or, the Federal Reserve would take some action that gave hope that it was over. Or, some legislative action, like TARP,  would get passed and hope would spring up again. Yet, the S&P 500 didn’t bottom until March of 2009, six months after the passage of TARP. 

Another important lesson was actually a validation of a lesson learned coming out of 2002 - don’t sell out of investments out of fear. There is always something to be fearful of. During crisis periods like 2007-2008 and today, those fears are exponentially more pronounced. However, when we sell our investments while they’re down, we lock in our losses and may miss out on a rebound. 

That leads to my biggest lesson coming out of the Financial Crisis - The country will heal and there may be some amazing opportunities in the process. I believe in using a well diversified investment portfolio, but I also believe that there are times when you can justify increasing your risk exposure and other times to lower your risk. Warren Buffet famously said that he gets fearful when others are greedy and greedy when others are fearful. 

I don’t know when it will be time for me to increase the risk profile in my own portfolio, but I’m feeling like it will be coming at some point in the midst of this COVID-19 reaction. This will be different for every person, as every persons situation is unique. But, I’m ready and willing to sit down with you and look at your situation and advise you on how to participate when this mess is over. 

I’ve already spoken to a number of clients about how this will look for them. Some of them have told me that they have money available to add to their portfolio. Now I have to say that past results are not indicative of future returns. This time WILL look different than last time. They always look different. This very well could, and probably will, drag out longer than any of us want (see lesson #1). But, I’m confident we will get through this. 

With that, I’m wrapping up for the week. I’m still mostly working from the house, but am going into the office each day for a little while. All of my calls are forwarded to my cell, so if I call you back from an odd number, that’s why. I am operating off of my laptop, so can do a video conference with you, if you want. I’m here to help however I can. Now back to homeschool.

Stay safe and social distant,

Jonathan Zimpleman