Financial Crisis Anniversary 10 Lessons — Jill on Money [ Archive]

The traditional anniversary gift for a tenth anniversary is tin or aluminum, so to honor the milestone of ten years since the financial crisis, let’s make a pinky swear and vow not to turn a tin ear to what happened and learn some important lessons.

To mark the occasion, I turned to what I think may become the first big picture, historical account of the event. Columbia University Professor of History Adam Tooze has penned a 600-page analysis of the causes and effects of the financial crisis called Crash: How a Decade of Financial Crises Changed the World. Rather than focus only on U.S. events, Tooze highlights how the highly interconnected globe was doomed to feel the impact of the financial crisis “and the economic, political and geopolitical responses to that crisis are essential to understanding the changing face of the world today.”

While a geek like me was delighted to immerse myself in the Tooze tomb, it also made me think, what larger lessons can I learn, ten years after the global financial cataclysm? I went back to some of my notes and media appearances from the early days of the crisis to see if the advice and analysis I proffered at the time, held up today.

On September 26, 2008, when I was a practicing planner and investment advisor, I was a guest on a TV network. The anchor asked, “Should I pull out of my investments and wait until the storm passes?” My answer was, “Assuming that you’re a long-term investor and don’t need to access your money for 10 years, guard against the emotional pull of the mattress. Look, going through bear markets is the price you pay to be an investor. If you pull out, you risk not participating in the recovery and yes, we will recover from this difficult period.”

Soon after, I fielded a lot of angry emails from people who thought that my advice was lousy. More importantly, I started to recognize an underlying fear that I had never experienced in my 20 years in the business. I quickly realized that it was important to acknowledge that the 2008 sell off was not like a run of the mill bear market. While I was reluctant to state my inner most anxiety, that the financial system was on the precipice of a major meltdown, I needed to recognize that there was a huge emotional component at work for everyone with money at risk.

When I was on air a month later, I started the segment differently, this time by saying, “this is a scary and difficult time,” and also understood that for many, the process of selecting investments years before the crisis was not well thought out and others may have made the mistake of taking too much risk.

Then I reiterated that for long-term investors, sticking to the pre-crisis game plan would serve them well. But here’s the thing—at the time, the U.S. stock market was down about 25 percent. Six months later, the magnitude of the loss would DOUBLE, which meant that there were a lot more angry emails and plenty of profanity-laced voice mails to boot. Of course, with a longer lens, it’s easy to see that fighting the urge to sell and remaining with a diversified portfolio makes sense. But in real time, that was hard to do.

Anniversaries of market upheavals should be a time to reflect on both smart and not-so-smart actions we took, not to gloat but to ensure that we don’t repeat mistakes of the past. Ten years later, it’s a good time to review some of the big lessons learned from the financial crisis. Here are 10 to consider:

Get Personal. When markets are in turmoil and you are scared, your personal situation should guide your decisions. The first step is to figure out where you stand and more specifically, you should understand the status of your cash reserves, consumer debt and current retirement contribution level.
Develop a Cash Flow. When we feel out of control, the simple technique of identifying what is coming in and what is going out can help you develop a short, intermediate and long term game plans.
Maintain a healthy emergency reserve fund. Bad luck can occur at any time, but an ample safety net (6 to 12 months of expenses for workers and 12 to 24 months for retirees) can help you avoid selling assets at the wrong time and/or from invading retirement accounts.
Balance fear and greed. At market tops, greed kicks in and we tend to assume too much risk. Conversely, when the bottom falls out, fear takes over and makes us want to sell everything and hide under the bed.
Maintain a diversified portfolio. One of the best ways to prevent emotional swings is to create and adhere to a diversified portfolio that spreads out your risk across different asset classes, such as stocks, bonds, cash and commodities...and don’t forget to rebalance periodically.
Keep Making Retirement Contributions. Amid uncertainty, this is hard to do, but if possible, stick to your plan and keep putting money away. If you need to reduce the amount due to unforeseen circumstances, try to at least capture any company match.
Manage cash. If you need money within a year or so, keep it in a safe place, like a checking, savings, money market or short term CD or bond. Do not tempt fate by putting money that you know you will need, at risk.
Beware the sales pitch. When we are fearful, we tend not to make the greatest decisions. So if someone (a broker, salesman, etc) pitches a brand new product, either when the bottom has fallen out or when markets are reaching new highs, take time to evaluate whether or not to take the plunge.
Be mindful about real estate purchases. Because housing was the spark that lit the financial crisis, it’s worth noting the obvious: prices can drop and putting down 20 percent for a mortgage - and try to stick to plain vanilla home loans, like 15 or 30 year fixed rate mortgages, unless you really understand what you are doing! There’s a good reason that old rules of thumb work.
Turn it off and take a break. Every crisis is replete with scary music and graphics. Once you have assessed your personal situation and made some choices, its smart to tune out from the 24/7 coverage.

The reason is clear: the drumbeat of bad news can lead to negative thoughts, like “I am never getting this money back” or “I will never retire.” These can take over your brain and crowd out everything else, resulting in an endless loop, which psychologists say can distort reality, disrupt thinking and erode performance. If you are starting to feel anxious, return to this list and remind yourself that you have a plan and you are sticking to it.