Outcomes May Vary

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After the recovery from the 2007-2009 financial crisis, we had some time to converse with clients about how well things had worked out in the end. Memories of the turmoil had faded and account values began to make new highs.

The less-financially-involved spouse in a client couple interrupted this discussion to say, “I just have one question. A lot of our friends lost half their money in the stock market, a couple of them even had to go back to work after being retired. Aren’t we in the stock market, too? How come we came out OK and they did not?”

You probably know the answer to her question. Most of the unfortunates who lost half their money turned a temporary downturn into a permanent capital loss by selling out at low levels.

Please notice how we characterized the panic. The failure of big institutions, waves of mortgage defaults, unprecedented action by Congress and the Federal Reserve, massive dollar losses in the markets, and economic turmoil with high unemployment and massive uncertainty are all wrapped up in the phrase “temporary downturn.” But that is not what the unfortunates perceived. It isn’t truly how it felt in real time to nearly all of us who held on, either. We all experienced concern or fear or anxiety.

So we all faced the same circumstances, a series of major economic and financial events that were beyond our control. The thing that mattered, however, was the one thing in our control: our reaction to these events. From the perspective of the long view, by putting these events in the context of history and properly judging them over the decades of a lifetime… we see that ‘temporary downturn,’ not a panic that compelled us to ruin our financial position.

Most of our clients lived through episodes of 10% unemployment before, 16% mortgage interest rates, no gasoline at the gas stations, and inflation devaluing our money at double digit rates every year. This is not to mention wars, assassinations, school children coached for nuclear disaster, and recession after recession. All of these difficulties proved to be transitory, producing only temporary downturns.

Long term investment success does not require perpetual optimism or rose-colored glasses. It does take, however, either a sense of confidence that we will handle whatever challenges may come our way—or a resolution to maintain our investment strategies anyway. We covered the End of the World Portfolio in a prior essay and reached the same conclusion.

From a tactical standpoint, we do need to know where our income will come from, and have the stores of cash we need for short term goals. Our comments above pertain to long-term or permanent capital. It makes sense to consider reducing volatility at market high points if that better suits your needs, and we’ll be talking about that when the markets recover.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including the loss of principal.