that the U.S. financial system as we knew it would never be the same again. Retirement as a concept would be dead, and non-wealthy folks would be unable to get a mortgage.
The great tragedy in such hype is that this scared people out of the stock market at what turned out to be one of the best buying opportunities in many, many years. U.S. stock prices are up about 790 percent since then and foreign stocks about 360 percent!
Here are the predictions and comments made on this show (after which of each are my comments):
“I question whether retirement as a concept is even going to exist in ten years.” This sure seems like hyperbole to me! We've gotten through challenging times before, and we will again. Most retired folks don't rely on short-term stock market gains to finance their retirement.
“Pension plans are in ‘big trouble’ and plans are going to come up short due to the poor stock market.” Pension plans are well diversified (including in bonds and other investment vehicles) and have weathered challenging stock markets before. A poor return for one year or even several years won't upset diversified pension plans managed for the long term.
“We've got a hurricane here, and everyone's got a hole in the roof.” For sure, some folks were weathering tough times, but many people were not.
“It will be ‘nearly impossible’ to get a mortgage unless you're very wealthy and have excellent credit.” This is utter nonsense. While it was a bit harder to get a mortgage in the aftermath of the crisis, you didn’t have to be wealthy to qualify for a home mortgage.
“Everyone has to ‘stop spending now.’” Making a blanket statement like this without qualifications is absurd. If you lack an adequate emergency reserve (three to six months' worth of living expenses) and are burdened with consumer debt, you should examine your spending and identify ways to reduce it.
As one of America's most widely followed popular psychologists, Dr. Phil reaches millions of people and can influence how they think about important issues. Unfortunately, I found the financial advice on his “Financial 911” program highly disappointing.
What started as “15 Days to Slow the Spread” turned into a multi-months-long — and in some portions of the country, a year-long plus — shutdown, which devastated many businesses that relied upon in-person activity. Especially hard hit were smaller businesses like restaurants, retail stores, and travel-related companies that were not set up to do business digitally.
Business activity fell greatly in March 2020 when the shutdowns began and continued into the spring months. Stock prices fell at an unprecedented rate. The Dow Jones Industrial Average suffered a 38 percent drop over a six-week period after peaking (at 29,568) in early February 2020 and bottoming out (at 18,213) in late March 2020.
The economic carnage happened quickly as well. After reaching a more than 50-year low at 3.5 percent in February 2020, the unemployment rate spiked to 14.8 percent just two months later. And while millions of laid-off workers were able to return to work within a few months, more continued to be laid off as the pain inflicted by the shutdowns continued and deepened in states with long shutdowns and more restrictions.
Handling one’s emotions is always a challenge during a catastrophic event, and the pandemic certainly tested large numbers of people in that regard. In addition to the perceived danger people felt from the possibility of catching the virus and possibly dying, the 24/7 media coverage focused on every last thing that could go or was going wrong. For sure, much of the media made it appear (intentionally or not) that things were worse and more dire than they really were.
Many folks expressed surprise at the stock market quickly bouncing back in the spring and summer of 2020 despite the large number of people still out of work and the many businesses hurting. This episode, like many others, highlighted that the financial markets are always forward-looking. So, while many folks were still out of work and the virus was still spreading and killing, the economy was on the mend and expected to continue to improve. The development of therapeutics to treat the virus and the rapid development and approval of effective vaccines led stocks to hit new all-time highs in late 2020, less than a year after the shutdowns began.
Hopefully, time and effort will be taken to examine what measures were and were not effective so that in a future pandemic, we won’t make as many mistakes.
Mistakes Made … and Lessons to Carry With You
We’ve been on a whirlwind tour of modern American economic and financial market history. Knowing what problems have occurred in the past and how things turned out after the fact can better help you to wisely navigate future similar problems and turmoil.
Emotionally, of course, it’s somewhat easy to look back in hindsight at all of the problematic events we’ve reviewed in this chapter. So, let’s recognize that we’re all human and have emotions that can get the best of us and cause us to do the wrong things at the wrong times (such as panic and sell stocks after a major decline) when we’re in the midst of a storm.
“Police went to Whole Foods where managers told them an elderly customer came in a few days earlier, hysterical after she realized she had mistakenly returned the box of crackers with her life savings inside. Frightened by the government takeover of several banks, the Lake Forest woman, whose identity was not released, had decided to take her money out of the bank and hide it in her home.”
For sure, plenty of folks were worried about the safety of their money with the stock and real estate markets getting pummeled during the 2008 financial crisis. But folks worrying about the safety of keeping their money in the bank reflected irrational fear. If the FDIC government system backing up our banking system failed to protect bank account depositors, holding onto paper money, also issued by the U.S. federal government, wouldn’t do you any good either.
Most folks can see the silliness and danger of keeping cash in a cracker box in your home. Cash kept in your home could be stolen, forgotten, or destroyed in a fire. Hearing stories like this can lull us into thinking that well, we would never do something so ill advised, yet many people make decisions and take actions that are nearly certain to lead to suboptimal or even terrible outcomes.
Consider some other detrimental financial moves I have seen people make during economic and financial market calamities:
Selling stocks at greatly reduced/depressed prices: When stocks are falling in value fast and the daily news is filled with gloomy headlines about job losses and other economic problems, I’ve seen plenty of otherwise intelligent folks dump their stocks and buy bonds or simply sit on cash in a money market or bank account. Typically, during such episodes, bonds are in high demand (and thus at elevated prices) and offering reduced yields. Now, don’t get me wrong — I understand the emotions behind this. No one enjoys feeling like they’re going down with a sinking ship or part of the losing team. But selling stocks low and buying bonds high is the opposite of how smart investors make money. Otherwise, sound investments that are beaten down in price offer value. That’s why smart long-term investors buy, not sell, stocks after they’ve fallen, and you should as well.
Following supposed prognosticators who claim to have predicted all these bad things that have recently happened: Fibbing
