10 Years Later

Ten years ago on March 9, 2009, the Dow Jones Industrial Average (DJIA) hit its low point of the financial meltdown at 6,507. Ten years later on March 5, 2019, it closed again at 25,806. The questions now are: “What happened? Can it happen again? What should we do about it?”

What happened is that the market crashed over a six month period because of a lack of liquidity driven by a substantial number of bad investments by many banks pretty much powered by greed and peppered with a lot of immoral if not illegal activity, and just plain stupidity and a disregard of sound risk prevention actions.

It can happen again. What happened ten years ago in the market duplicated actions that have taken place throughout history and particularly mimics financial history with too many examples to even try to start to recite them here.

What we can do about it. Here is where you can be affected. What happened is meaningless right now except as a lesson to be more careful and more diversified and to make sure you have a safety net, i.e. rainy day fund, to fall back on, no matter what happens.

Some background: We tend to measure things at the extremes. Losses are measured from the highs. Gains are measured from the lows. The reality is that hardly anyone ever gets in at the absolute low or gets out at the absolute high, yet that is what determines how we feel. How we feel has nothing to do with how our investments are performing or how well we are protected from extreme changes.

Measuring performance needs a realistic starting and ending point, not arbitrary highs and lows. The purpose of the measurement also needs clarification. It is nice to keep track of things and to measure progress or growth, but for what purpose? If it is to determine how you should feel that would accomplish nothing that can affect you tangibly unless those feelings make you physically sick or can move you out of some doldrums. If the purpose is to measure progress toward attaining goals then we need to make sure we are measuring the right things. For instance, are you measuring the change in the value of your assets and for what purpose, or the sustainability and growth of the cash flow from those assets?

There is a reality with investing. That reality is the benefits that can be derived from the investments. If investing to acquire enough to buy a bigger house, a vacation place, go into a business, take off a year from work, or fund a child’s education, there are specific time-based goals where the accumulation of a fixed amount of assets is important, and that becomes the goal, and the measurement is important. If the purpose of investing is to be able to have sufficient cash flow to maintain a particular lifestyle for the rest of your and your spouse’s life’s, then that should be your goal. However, in that case, the goal should be cash flow instead of asset accumulation. There is a difference in investing for cash flow rather than asset growth and that should determine how you should look at your investments, and when and at what measuring points.

A definite measuring point is always “today.” However, tomorrow is also important because regardless of why you are investing, there is a goal set in the future. The way to measure is not from a point to another point, but from where you started to where you want to end up; and the ending up is usually at a distant point. So, what you need to ask yourself is whether you are still on target to attain your goals. If your goal is asset growth then review the sudden dips to determine if the underlying fundamentals have changed that will pull you off of your goal. If the goal is sustainable cash flow at a later time, then determine if the current drops in stock values will result in changes in the dividends those companies are paying and whether the drops indicate a change in the paradigm of your investment plan.

I know it is hard to ignore drops in stock prices, but drops are normal, just that over a long period of time the drops hopefully will be fewer than the ups and the overall plan will be sustainable with the needed asset growth or cash flow.