Sometimes financial journalism nails it.
Markus Muhs - Feb 19, 2020
I dug up a great article from 2008, during the crash, that includes the time tested advice you can use in all market conditions.
Anyone who has read my stuff (blog, newsletter, Market Muhsings) for any stretch of time knows I’m no fan of financial journalism, or the “financial noisemedia” as I like to call them. For the most part they report nothing of any use to average investors; they only inflate pessimism when the markets are down, hyperinflate optimism when they’re up, and provide a platform for so-called “experts” to pump their favorite stocks.
On rare occasions, financial journalism gets it right though, and nothing can be more right than this article from the Edmonton Journal that I dug up from October 1, 2008.
To be honest, I didn’t randomly stumble upon it in 2020, rather I happened upon a printed copy of it while moving offices last year, buried under a bunch of other stuff in my desk. The printed copy has a printed on date of October 2nd, 2008, so I don’t think this is even something I printed but perhaps some other advisor did and maybe it was given to me or I found it in a desk I inherited?
Scribbled on the paper in my writing, from back when I found the article, are the numbers for the TSX Composite and S&P 500 (SPX) at the beginning of October 2008 at 9,763 and 969, respectively. This is already after pretty substantial drops in the respective indices from over 15,000 and over 1500.
October 2008, when the above article was written was a very dark time. Lehman and Bear Stearns, that was a couple months ago, Bank of America, Citigroup, Royal Bank of Scotland, the nation of Iceland, all looked to be on shaky ground. Near-1000 point drops in the Dow Jones or TSX were happening a few times a week and though there were some strong recovery rallies, they were not much more than “dead cat bounces” and it looked like there was no end in sight.
I want you to read the above article, in its entirety from that gloomy perspective, not from the perspective of someone in 2020 who has just experienced nearly 11 years of mostly market growth.
The previous owner of this print-out had already highlighted each of the paragraph headings and I remember that they couldn’t have been more crucial to the start of my career back in 2008. Had I entered the financial advice industry expecting to be a stock-picker, selling my service based upon my mastery in portfolio management, I would have certainly failed because no one—absolutely no one—could look good picking stocks at that time.
For much of the 80s and 90s, it didn’t take a degree in finance or fancy letters after your name to be a successful financial advisor. The rising tide lifts all boats and neither the competency of advisors, nor the high commissions the industry collected, ever came into question. 2008 was the opposite; you could be absolutely brilliant and your client portfolios will still decline faster than they ever have before. You could put 10+ hours into a financial plan and the client would still only be concerned with the bottom line on their statement.
Paragraph 3 in the story could not be more true: Make sure you have a written longterm investment plan and stick to it. I’m thankful that I was with an organization that put planning first and instilled this in me (in due course in my clients) from early on.
This might be a great time to buy if you have the cash. Brilliant advice that was also echoed by Prime Minister Harper during the 2008 election campaign around that same time (to the mockery of his leftist opponents who likened it to telling people to gamble on stocks when their roof was leaking). To be fair, I think Obama said the same during that fall’s Presidential Election as well.
Reduce your debt. This is all-weather advice. In hindsight, had we all known that interest rates were going to be on a downward trajectory for the next decade, and that fall 2008 to spring 2009 was a once in a generation opportunity to buy stocks at super low prices, we should have ignored this entirely. We can never know though, and reducing your debt works out favorably no matter where we are in the economic cycle.
Keep investing and stay invested. This is so damn obvious in hindsight, but at the time when it looked like the financial system as we knew it was coming to an end, many of us were simply scared. Some of us bailed entirely, and I admit to having lost two clients early on who simply couldn’t—despite all my long-term planning—stick with their plan and see a bear market for what it really is; a short-term interruption to a sustained long-term growth trend. After having talked them out of bailing a few times already and having witnessing a colleague of mine receive a court summons from a client after going through the same thing (being told not to bail, then bailing and formalizing a substantial capital loss near the market lows) I didn’t want to take my chances anymore and I let them bail.
One of my youngest clients at that time, who was really served up the market on a silver platter right near the beginning of his investing lifetime, opted to suspend his monthly RRSP contributions. Not only that, he also put his new RRSP contribution into cash because of this market volatility, and I—still too novice of an advisor and not confident enough to tell a client he was wrong—obliged. At least he wasn't bailing on the rest of his investments.
The second last point in the article on have an emergency fund, just like reducing debt can be seen as all-weather good advice. Don’t let yourself ever be in a position where your investments are down a bunch and you need to sell them at a substantial loss because you need the money for some reason or another. WTI crashed from $140 to below $40, so there were significant job losses in Alberta. If $30,000 is an appropriate emergency fund for you, based on 3 or 6 month family cash flow needs or whatever metric you want to go by, and $30,000 is all the money you have: $30,000 should be sitting in a savings account collecting dust and a bit of interest and has no business whatsoever being invested into the markets. Once you’re well set on your emergency fund, only then may you invest your excess savings in long term equity-based investments. As Warren Buffett once said, he makes every investment on the expectation that the markets could be closed tomorrow and not re-open for five years. Make it 10 years for your long-term investments, because that’s how long (sometimes longer) it can take for markets to recover from a big drop. In other words, assume the money you invested in the markets is locked up in a 10 year GIC that you can’t break.
By March 2009, luckily enough, whichever former Canaccord advisor printed this article didn’t throw it in the trash heap, because by then the TSX had fallen another 23% to its lows at around 7500, and the SPX another 30% to its ominous 21st century intraday low of 666 (to put in perspective, the market was higher in 1996; 13 years of growth wiped out). All this good advice held though, because we know what happened since and I don’t have to tell you that the SPX is now 3x what it was on October 2008.
Today we look at the markets from completely the other side of the coin. We had a number of double digit return years since 2009, and at worst we saw declines of 20% that fizzled in 2011 and 2018. Confidence is much higher and investing in stocks for the long run is a no-brainer. I fear too many are investing in stocks for the short-term also.
Look at these two extremes and know where we are and that normal is somewhere in between. I’m not predicting that we’re at a market top or that there will be another massive crash tomorrow. Even if there is a big crash in the short-term, stocks are still by far the best vehicle to fund your retirement if it is more than ten years away.
Re-read the short article referenced above. Most, if not all the points made are every bit as valid in the 12th year of a bull market as they were at the bottom of a bear market or just one year prior.
An investor who bought stocks at the SPX highs of over 1500 in October 2007 and followed all the advice in the article is in very good shape today, having more than doubled their principal and collected and reinvested dividends along the way. Likewise, if someone had the absolute worst luck and bought U.S. stocks the day before the 1929 crash for their retirement 20 years away, they also ended up coming out ahead.
You cannot predict the markets. I cannot predict the markets. The financial noisemedia can’t predict the markets. All you can control is your strategy and your behavior before and during the next market correction/crash.