Here we go again.
The last couple of days have given many Americans a sense of déjà vu. The Dow Jones Industrial Average DJIA, +2.33% and the S&P 500 SPX, +1.74% each fell more than 4% on Monday, the biggest one-day percentage decline since August 2011, but rebounded by 2.3% Tuesday. The drop seems eerily familiar, but it’s really the overreaction we have all experienced before.
“It was expected after the amazing market run,” says Rich Guerrini, CEO of PNC Investments in Pittsburgh, Pa. “We were long overdue for the events that we saw over the last couples of days. Right now, it doesn’t make it any less alarming. We haven’t seen that in a while and it just made a big piece of volatility feel that much more uncomfortable. We will continue to see volatility.”
This is nothing like the subprime-fueled crisis that led to the 2007 stock market downturn and Great Recession, says Kyle Woodley, senior investing editor at Kiplinger.com. “The economy is strong, unemployment is low, earnings are good and they are about to get better under Republican tax cuts,” he says. And the housing market currently shows no signs of a 2008-style bubble.
The last downturn is a recent reminder not to repeat mistakes from the past. As billionaire Warren Buffett wrote to Berkshire Hathaway BRK.A, +2.50% shareholders in 2008: “When investing, pessimism is your friend, euphoria the enemy.” Here are other lessons from the last stock market downturn worth remembering as investors mull over the volatility of recent days.
Don’t buy one stock
Even Buffett makes mistakes. In 2008, he told his shareholders: “During 2008, I spent $244 million for shares of two Irish banks that appeared cheap to me.” He had an 89% loss by the end of 2008. “The tennis crowd would call my mistakes ‘unforced errors.’” And those losses didn’t end there. In fact, two major Irish banks were nationalized by the end of the crisis.
Don’t overextend yourself
Another nugget from Buffett’s 2008 letter to shareholders: Signs of aggressive mortgage lending 10 years earlier were a “canary in the coal mine” for the housing market. “But investors, government and rating agencies learned exactly nothing from the manufactured-home debacle,” he wrote. “Instead, in an eerie rerun of that disaster, the same mistakes were repeated.”
Don’t time the market...
Dimitri Uhlik, senior financial adviser at Better Money Decisions in Phoenix, Ariz. has a motto: Time in the market, not timing the market. “I say that all the time to my clients.” Investors who panicked and sold large swathes of their portfolio near the bottom of the market in 2008 likely regretted becoming too emotional six years later when the market eventually recovered its losses.
...or buy into the hype
“Don’t buy into trends like bitcoin and cannabis,” Uhlik adds. “It’s not that they’re not good investments. You can still own some, but don’t abandon your investment strategy as the last few months have shown us with bitcoin. Don’t base your investment decisions on your political views.” He has another favorite phrase for clients: “The trend is your friend until the end.”
Don’t chase returns
Take note of the hyperbole and other people’s panic. If it’s forced you to think about your retirement and asset allocation, that’s a good thing. But don’t act impulsively. “Revisit your goals and aspirations,” says Rich Guerrini, CEO of PNC Investments in Pittsburgh, Pa. “Have an understanding of the risk in your portfolio or your 401(k). It’s just like your annual physical.”
Don’t make big bets...
Investing large amounts of money is just as risky as withdrawing large amounts of money. “Investing isn’t an all or nothing decision. Putting small amounts of money to work overtime reduces your market-entry risk and is an effective way to conquer investor paralysis,” says Benjamin Sullivan, a certified financial planner with Palisades Hudson Financial Group.
...and don’t act alone
If in doubt, go out and talk to a financial adviser, Guerrini says. Don’t act alone and don’t take advice from people who believe they know more (or even less) than you do. People who were able to sit tight a decade ago prospered. “Ultimately, stay true to your financial goals and your own personal time horizon,” he says. “If you did nothing 2007, you’d be in a great situation now.”