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Financial lessons learned from the Great Recession

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Last month was the 10th anniversary of the collapse of the investment bank Bear Stearns. The fall was part of the 2007–08 stock market crash, when markets fell nearly 40 percent from their highs and left an indelible mark on the psyche of investors.

Many people were panicking and selling investments at their lows during the crash, but most investors who maintained their saving and investing plans during those tumultuous times have performed well. Simply put, investors who did not get scared out of the market during the rough times saw much better results than those who did.

In fact, a Fidelity study of retirement plan savers who did not panic and sell through the 2007–08 period grew their balances by an average of about 240 percent; that was about 50 percent more than investors who bailed out of stocks at any point in 2008 or the beginning of 2009.

So the next time there is uncertainty, remember the following lessons learned from the past downturn:

Keep a long-term view. What may look like a huge loss on a short-term stock chart is really just a blip over a full business cycle. From late 2007 through early 2009, the S&P 500 lost about 40 percent of its value. Many investors at the time thought the market would never recover in their lifetime. However, since those lows, stocks have made record highs, up nearly 100 percent since the bottom. Which leads me to the next point…

Don’t panic. Selling into a crashing market is rarely a good idea. As the legendary investor Warren Buffett is fond of saying, “Be fearful when others are greedy and greedy only when others are fearful.” In other words, when everyone is panicking and selling their investment, it might be a good time to consider buying more.

Time in the market, not timing the market, is still the best way to take advantage of long-term market gains. Selling into the panic might have a dramatic impact on your investment performance. A study conducted by Putnam Investments for the period from 2003 to 2017 showed clients who stayed fully invested in the S&P 500 index had a 9.2 percent annualized total return. Missing just the 10 best days dropped performance to 5.03 percent. And missing just the best 30 days in the market wiped out any return at all. By the time those who bailed started saving and investing again, it was too late to overcome the effects of lost savings and growth opportunities.

Maintain a diversified portfolio to help manage risk. A well-diversified portfolio of stocks, bonds, and cash can help manage the volatility of your portfolio. Diversification is a technique that reduces risk by allocating among different assets, classes, and aims to maximize return by investing in different areas that would each react differently to the same event. Although it does not guarantee against loss, diversification is an important component of reaching long-range financial goals while minimizing risk.

Invest regularly, despite volatility. If you invest regularly, short-term downturns will not have much of an impact on your overall performance. Instead of trying to judge when to buy and sell based on market conditions, take a disciplined approach of making investments weekly, monthly, or quarterly to avoid the perils of market timing. While it won’t guarantee positive returns, investing through downturns — when prices fall — may actually benefit you in the long run. When the market drops, the prices of investments fall, and your regular contributions allow you to buy a larger number of shares.

In fact, what seemed like some of the worst times to get into the market turned out to be the best times. The best five-year return in the U.S. stock market began in May 1932 — during the Great Depression. The next best five-year period began in July 1982, during one of the worst recessions in the postwar period, featuring double-digit levels of unemployment and interest rates.

Consider working with a financial advisor. Sometimes the hardest part of being a successful investor is controlling your emotions — getting overconfident at the top of markets and too fearful at the bottom. An objective financial advisor can help you try to reach your financial goals.

Anthony N. Corrao is an independent advisor with Corrao Wealth Management. For more than 25 years, he has helped families with their financial goals by developing financial, educational, and retirement-planning strategies. He can be found at www.corraowm.com.

Securities offered through First Allied Securities Inc., a registered broker dealer. Member FINRA-SIPC. Advisory services offered through First Allied Advisory Services, a registered investment adviser.

Updated 5:05 pm, July 9, 2018
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