Revisiting the Great Recession: Part 5

Tina Haapala |

Last time, I looked at what the government learned from the financial crisis (don’t bother looking up the previous edition—the answer was not much).

Starting this week, I want to talk about what the individual investor, you, should have learned from the crisis. We humans have the tendency of forgetting lessons older than about 6 months, so even if we learned we might have forgotten.

First, let’s deal with the crisis itself. The Feds didn’t see it coming. The banks didn’t see it coming. The insurance companies didn’t see it coming. The investment powerhouses didn’t see it coming. I didn’t see it coming. You didn’t see it coming.

For some of you that last statement is a difficult one. Because you know you saw it coming. Perhaps you did. I’m happy for you. But why after amassing millions of dollars are you reading this column? Oh, you didn’t amass millions of dollars? You knew what was going to happen and you did nothing about it? I guess you didn’t want to take advantage of the rest of us. That’s nice.

Or maybe you remember you thought something was wrong with real estate or mortgages or the banking system but couldn’t put your finger on the position of the actual problem. Unfortunately, knowing that “something” is wrong is a lot different from knowing “what” is wrong—and much harder to act upon.

Or maybe you predicted exactly where the problem laid and acted appropriately, pulling your money out of the stock, bond, and real estate markets. Now here’s the issue: Did you get back in? See, you must predict that a crisis was to happen and where it was to happen then do something about it. Next, you would’ve needed to predict when it was going to end, and then do something about that. If a person miraculously got out of their investments in late 2007 but didn’t get back into the market their portfolio would have done worse than someone who just rode the markets down and then back up again.

Or maybe you got it exactly right pulling out in late 2007 and getting back in early 2009. What have you done lately? See, getting things right once is luck if you can’t do it again. I’ve had more than one former client get out of a market because they just knew a crash was coming…and are still waiting years later for that crash to occur. Others do finally get back in only to have their prediction finally come true soon after.

So, to get this right you must predict a problem and have the prediction detailed enough to know what to do about it. Then you must have the conviction to actually do something about it both to take advantage of your prediction and then to get out after the markets have gotten over the worst of the anomaly. Then you can’t have other predictions of yours not come true and in the process taking back the profits from your previous brilliance.

Lesson for this week: You won’t see it coming in a way that allows you to win.

Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing