Lessons Learned the Hard Way

Here's a list of lessons several of us learned the hard way in 2008:

• Losses can be long term -- Stocks can lose money, even for a decade. So what is the new answer? Looking ahead, investors need to understand that it could take as long as 20 years for stocks to recover fully from major downturns in a worst case. So investors who are nearing retirement — and don’t have that much time to recover from market losses — need to think twice about putting all or virtually all of their portfolios into stocks.

• Stocks aren't the only game. Diversification means owning different assets, not just different stocks.

• There’s an argument for owning Treasuries at all times, even though some investors have argued during the present downturn that they can find far more attractive yields through other investments. Only those who own Treasuries for current income need to worry if their government bonds are offering the market-leading yields. For long-term growth-oriented investors, the primary role of Treasuries is to provide ballast and protection to a portfolio — not capital appreciation. That’s what stocks are for. And as this bear has shown, no investment can beat Treasury bonds when it comes to protecting one’s portfolio in a downturn.

This makes me think of the old DC Talk song "The Hard Way." Here's the chorus:

Some people gotta learn the hardway
I guess I'm the kinda guy that has to find out for myself
I had to learn the hardway, father
I'm on my knees and I'm crying for help

Ha! I think a lot of people are on their knees and are crying for help after seeing their end-of-year 2008 investment statements. I look at my returns monthly, so I took my medicine over several months. But I had a friend at work who refused to look at his 401k all during the stock market decline. Then he looked in late December. He took all his medicine at once -- and he sure was on his knees when he did. ;-)

Seriously, I think these are all good lessons to learn, though they were quite expensive for many of us. I think what we just went through (and are still suffering from/going through) will serve us all well if we learn from history. But if we just shrug it off, we're condemned to repeat it. I know I'm a bit more diligent about asset allocation from this past year. How about you?

Comments

[michelle]

That is a really great song! Made me smile this morning, remembering it!

[Emma]

Anecdotally, the diversification one is pretty big among my younger colleagues - for a lot of people who didn't have money invested during the dot com boom, there was no need to hedge with bonds etc; especially those with limited funds to save - it almost seemed like wasting opportunity to invest in stocks. Hopefully they actually learn the lesson, of course!

[Forex Grid]

I doubt that they actually learned the lesson. History teaches only that it teaches nothing...

[Neal Frankle]

I appreciate the post. Some folks, maybe a few, will learn this lesson but I think Emma has it right. Case in point: The tech bubble didn't keep many people from getting into the real estate bubble. Fear and greed are as eternal as death and taxes. But your post helps remind us all. Thanks.

[Kevin M]

I have people calling me asking if they can take some of their unrealized losses on their tax returns this year. Of course the answer is "no", but I usually add on the fact that they never paid tax on the gains when they were increasing either.

[pete]

I have a question. I have a 401K investment with our company (Tiaa-cref). I invested in 2035 retirement index fund. I know, FMF likes index funds and so do I.
I lost around 2000 dollar this year alone. I just started 401 K almost 18 months back. I am 30 years. My net life to date contributions were : 13K, and savings I have are around 9K.

Will this correct out when we have a rosy market. Do you think I should shuffle around here?

[Miss M]

I seem to only learn lessons the hard way! At least I do learn and try to pass on my experience for others to learn from. I think it does take a down market to teach about better investing, when the market is trending up almost every stock is a winner.

[thomas]

I'm just gearing up for my bailout. They give bailouts to people who saved money, shopped wisely, and got into a house they could afford - right?

[poor boomer]

I shopped wisely and lived VERY frugally, but I'm not getting a bailout.

[FMF]

Pete --

if I were you, I'd pick an investing allocation and stick with it through thick and thin.