Lessons I learnt from the 2007-2008 Financial Crisis
Ten years ago, the 2007-2008 Financial Crisis rocked you, me and the whole world. The Dow Jones Industrial Average (DJIA) peaked to 14,164 on October 9, 2007, and hit the bottom of 6,507 on March 9, 2009. DJIA dropped by 54% from the high of October 2007.
I was very scared. In less than one year and half, my investment portfolio had dropped by more than half. It was a very depressing situation. I talked to some of my relatives who went through the Great Depression in 1930s, and tried to get some insights.
I asked them: “what is really going on?”, and “where is the market going to?” Unfortunately nobody had the answers. They felt it was probably worse than the Great Depression.
My biggest financial mistake
In mid October 2008, when the DJIA slipped to 9,310, I couldn’t take it anymore. Too worried, I thought I got to do something.
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Before then, my 401K was pretty much maxed out. For my take-home pay, I invested quite a lot to the regular brokerage accounts monthly. The no load and low cost index funds are always my favorites.
In October 2008, I stopped investing to the brokerage accounts. What a big and stupid mistake I made!
I was trying to lower my 401K investment. Fortunately, that didn’t happen. Why? I logged into my 401K web site, changed the contribution percentage to the minimum (just to get the company match). Then after one week, my change didn’t take effect yet. It was a huge company, and stuff ran slowly.
For some reason, I changed my mind, and reversed the 401K contribution back to the original percentage. Why did I reverse the call? I don’t remember it, not that rational either. Thank God! That was one of the best lucks I ever had. So, when things in your company are running slow, try to take it as a blessing. I’m serious. At least, it saved me a lot.
Why stopping investing was a big mistake?
For my investment to the brokerage accounts (the after-tax money), it didn’t resume until May 2011. At that time, the DJIA already climbed back to 12,500. My dear mistake lasted for 2.5 years.
Here comes the Dollar Cost Average. The concept is very simple: you keep investing a certain amount, no matter of the market. When the market is high, you’ll get less number of shares. When the market is low, you’ll get more shares.
This way of investment won’t make you rich overnight for sure. But it reduces the impact of market volatility to you, and is good in the long run. The reason is that, overall the market goes up, if you look at the longer horizon.
Everyone knows the Dollar Cost Average concept. I feel good about investing new money when the market going up, like the last 8-year bull run. Yes, everyone is a winner. But, when the market goes down, and down, the psychology plays a huge part. In 2008-2009, and I let the scare dominate my decision, which was totally wrong.
The lessons I learnt is: instead of focusing on the market right now, try to look at the next 5 to 10 years. 10 years down the road, when you look back, this is the truth:
- Investing when the market going up is good
- Investing when the market going down is even better (don’t quit!)
- If you have the spare money that won’t be needed in the next 10 years, try to increase your investment when the market is close to the bottom (if you know where the bottom will be). This is the best.
As an investor, we don’t know how the market goes tomorrow. Don’t be discouraged by the market volatility. Have a consistent investing strategy, and look at the bigger picture. In 20 or 30 years, you’ll be very proud of what you have done today. Have fun on investing.
How did you feel during the Financial Crisis from 2007 to 2009? What did you do to your investment?
Take a look at my eBook, a mini-memoir on Amazon: “DAD’S BICYCLE: Journey of A Chinese Family”.