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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.