Quick History of Stock Market
I love in this idea of grabbing the bull by the horns. What's past is prologue. I think it's really helpful to look back at the history of what the stock market is done, so that when we have moments of panic, we can think OK, it's cyclical. This is what it does. This is economic cycles. Things expand and contract. That's how this works. Still going to give you a bubbly. Tell me when you see your numbers in your portfolio going down. But hopefully remembering that this has happened before and it does come back around will provide you with a little bit of these. And then we're actually going to get into real prescriptive ways that you can protect yourself from yourself when the market takes a tumble. But first, let's take a stroll down History Lane. We're going back to predating the stock market. 36. Over in the Netherlands, this is one of the most classic examples of what gets referred to as a bubble tulip mania. Two lives were all the rage back in 36. I don't totally know why, but ev...
erybody wanted their hands on some tulips. People were dumping their life savings to buy tulip bulbs. They were stockpiling them. The assumption being someone else in the future is going to pay a bigger price than what I did. That's what we're always doing when we're investing, then the market falls out. All of a sudden, it has reached this fever pitch and on the bubble pops, and it's no longer is trendy to own tulips. So people are scrambling to sell their tulips, and naturally, now supply and demand has reversed, and you no longer can get money for these bulbs and people. Some people lost life savings. This is an example of a bubble Some of us might have participated in a bubble in the 19 nineties. Beanie Babies. That's an example of a bubble. Remember how there is this fever pitch for getting your hands on those? They had the many ones and McDonald's. Everybody was all about them. You were convinced the Princess Diana one was gonna pay for your college education. That's a bubble, and these always air happening now, getting specifically into the market. Most of us are familiar with the Great Depression, starting in 1929 black, Tuesday, October 29th this starts the Great Depression, and the stock market starts to seriously hemorrhage, So $14 billion was lost in the first day. This is 19 twenties money, $14 billion over the entire four days. You saw losses of $30 billion in 19 twenties money in 2018 terms that would have meant over $ billion. Just the bottom completely falls out again. Like tulip mania. People have lost life savings. People are panicking. Have you seen the movie? It's a wonderful life. There were runs on the banks. People are desperately trying to get into the bank and get access to their money by 1932. So a couple of years out investment still are only worth about 20% of what they had been worth prior in 1929. Now here's what to me, is interesting about the Depression. There's actually a few different arguments about when the country came out of it. Some people argue that it took a full 25 years for the stock market to return to full power. Now, also keep in mind during that time were fighting World War Two, so obviously that also would have contributed to economic growth being stopped. But others say that if you were in the crash in you didn't touch your money. You didn't sell. You just left it alone. By 1936 you would have returned to the value that you had lost. You would have returned to your pre 1929 money. And the reason I like to bring this up is it talks about this idea of a cycle, and we're going to talk a little bit about the idea of locking in your losses that when you panic and sell, it's then really hard to figure out when you get back in. But if you are able to leave well enough alone and you just let it kind of ride out, it does come back around, which is why it's really important to have an emergency fund so that you don't have to tap your investments when things go rocky in the stock market. Now I'm going to get into the great recession, which I'm sure many of us were directly impacted by everybody sitting in this room and those of you who are reviewing. But before I get into that I do also want to point out the Great Depression. The great recession are not the only times the market has taken a tumble. I can't walk you through the whole history, but I do a lot more in the book. But one example was black Monday because we're super creative with our terms. That happened in 1987. This was actually one of the first times that we really saw the global economy and how interconnected it had become. The panic actually started in Asia and kind of shoots over around. And by the time Monday, things open in our markets. Everyone has started to panic. That was that. It was really the colon, a recession. It was almost more of a correction. Didn't last very long. Things did come back around, but it was starting to prove that what happens in the rest of the world does directly impact us. And what happens for us domestically also impacts global markets. And then, in the early two thousands, we had the dot com bubble burst. So if you were out in Silicon Valley in the late 19 nineties and you just had dot com on the end of your company veces or throwing money at you left and right. It was really easy to get money out there then, because it was the wild, Wild West of figuring out the Internet. But just like with the two loves, things over saturated and bubbles burst and eventually that also led to a big decline for a period of time. Also, then 9 11 happens, which also, of course, rocks not only our markets but the global markets. So you also see market issue in the early two thousands. Then we get to 2000 and seven. At the end of we're starting to see a crisis about to emerge that is built on the foundation of mortgage backed securities. It would take the full 90 minutes of this class for me to attempt to explain mortgage backed securities, so I'm not gonna do it. But if you watch the big short, that does a pretty solid job of explaining it. But just understand that things are going haywire. The Dow Jones index, which I referenced earlier the Dow Jones index alone, went from more than 14, points to 6547 in the year and 1/2 points. Really, the best, most simplest way to understand this is as points go up, your stock prices are going up, but this points backslide and go down. Your stock prices are going down intense over simplification, but just understanding that's what it means. The great recession is often cited as one of the worst economic crisis we've seen in this country since the Great Depression. It's interesting is that technically we start coming out of it in 2009. A lot of us would beg to differ, but in terms of growth cycles was actually 2009 when we started to improve and then the market goes on a tear were actually kind of still in the tear. So the market just goes on this amazing bull run after the great recession happens. So if you think about the fact that a lot of people panicked and pulled their money out and then all the sudden the market takes off, so now people are trying to figure out timing. When do you get back in one is the right time to buy back in. Some people are thinking it's going to go back down. I'll wait til it goes back down, but it doesn't. It just keeps charting up. And that's part of the problem of panicking. And a downturn is if you pull money out, then you're having to make the decision of When do I get back in the game and in that time period that you're making that decision, you're losing out on a lot of earning opportunities. So the S and P 500 index, for instance, went from a low of 676 points in March of 2009 to as high as 2872 in January of 2018. And the Dow itself, The Dow Jones is what often gets reference when we're talking about the market when you're watching CNBC and they're always talking about the Dow. So in March of 2009 so right before we start to enter the rehabilitation, it had dropped to points in 2009. But then it really goes on a tear, gets to the highest it's ever been in 2018 and closes at over 26,000 points. So not only did we go through something bad, but we just went on an absolute bull run afterwards. But one thing I can promise you in your life is an investor. It's going to go down at some point. Can't crystal Ball tell you when? Otherwise I'd be such a billionaire by now. But I can tell you that the market's going to go down and you're gonna have to know how to handle that emotional reaction that we're gonna have. You can be the most logical person in the world, but when you log in to your investment portfolio, I don't know why they do this. But it's like angry red numbers with angry red arrows pointing down that actually shows up on the screen. They need to fix that. You're gonna freak out. So what can you actually dio one decode the inflammatory headlines? One thing that's also interesting about the Great Depression, as they actually attribute some of the media reaction and the way the media was reporting the news as one of the triggers of the Depression. So I think it's really important for you to know tow, watch what people are saying, When you re things like worst decline in history, when that's coming up on some sort of article that's floating around and it's in your timeline, don't let that freak you out because what happens is that those headlines do not actually provide any context, so they might technically be true. But hear me out on this. In 2018 we went through a little bit of a market correction. There were a few days when the market drops, then it would rebound. One of those days you would see headlines like Biggest point decline in history. But I had just said that in 2018 it reached pre recession highs. Highest the Dow Jones had ever been so when it had it's quote unquote worst decline in history. Factually, that was correct. It had never dropped 1100 points, but that was still higher than it had been just six months prior. So sometimes these headlines, because if it bleeds, it leads, happens a lot of media. Sometimes these headlines get put up, but the context is really were still fine. Don't panic, but you're not as likely to click as in the context of history. This is the largest point decline that's ever happened. But really, it's still higher than it was just six months before. That's not quite a slashes where's decline in history, So make sure that you try to contextualize the headlines for yourself. Oh, I also like that they use freefall and plunged those or other words that you're going to hear a lot when you're talking about the stock market. So always just make sure to do some thorough vetting. When you see headlines like that, you also need to know what's happening in the world. I've already mentioned it a couple of times that our markets really are very interconnected. So in 9 happens here, it sends a panic around the world. When the Brexit vote happened, our markets started to quake a little bit. Any sort of uncertainty really does put strain on the markets. So if you're seeing if you are one of those people that check every single day, I don't advocate that you dio. But if you dio and you wake up and you see those angry red arrows, check the news, see what's happening. That could be a simple is that as an explanation for why the markets are going down. Another idea I like is this of just waiting a day. Someone named Calling Jack and How to Use a CFT. And she's a senior investment analyst for Vanguard interviewed her for the book, and she had this great quote where she said, Just try to think through Why am I going to do this? Because the hardest part is you have to make three decisions when to get out, when to get back in and where to invest in the meantime, and getting all three of those things right is extremely difficult. So that's a really simple way to express what I was saying earlier where if you locked in your losses, if you sold everything in 8 4009 when the market was shaky and then it goes on this terror and you're trying to figure out when to get back in the game, you could have lost thousands of tens of thousands and even mawr in terms of compound interest over time. That's why it is important to make sure that the way you're investing is aligned with your time horizon. When you need that money your risk tolerance and your asset allocation that all those factors come into play. Another thing that Colleen actually said to me was just a look she shared with me that when she was in 2008 she was a pretty seasoned investor at this point. She didn't look at her portfolio one time in and the reason being she had invested in a way that was aligned with her goals for Time Horizon, her asset allocation, her risk tolerance. But that looking at those numbers even though she was professionally does this for a living was gonna freak her out and she actually took a look at your portfolio. So she said, You know what? Not gonna look just going to keep investing every month as normal and hope this goes away quick because I don't like dealing with that. She just didn't look at the numbers, and it didn't send her into a spiral or panic. And she didn't sell so one thing to dio. At least take a day, maybe a week, to not look at the bleeding. If you're starting to feel a little panicky and try not to panic and sell because, as I've references term a few times, this idea of locking in your losses, I also like to think about it in the positive. I had a professor one time who said one of her neighbors would get in the elevator with her and he knew that she worked on Wall Street and he was a You know, I made X amount of money on this company today and she would go, Would you sell? You know, she was. Well, then you didn't actually make the money because really, it's all theoretical until you sell. So the idea of selling and locking in your losses when it's down or, you know you haven't really made the money until you sell it a high either. So if you can just, you know, don't panic and sell when it's down, then you aren't quote unquote locking in your losses and you also giving the market an opportunity to recover and go back up so you don't have to make those decisions of wind to sell and when to get back in and where to invest. In the meantime,