Lessons From the Financial Crisis: We've Been Here Before

For investors, the last few years in the stock market have been a roller-coaster ride.

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From 2007-2010, the markets were extremely volatile both on the upside and the downside. Throughout this, we were continually assaulted by prognosticators, economic forecasts and countless gloom and doom scenarios. How could investors hope to act rationally and with common sense when surrounded by the temptation of reacting to current events?

In the midst of any crises, we tend to forget that we have faced and dealt with adversity before, and have been well-rewarded for our conviction in the long run. Steering clear of the temptation to believe in a crystal ball and not making investment decisions based on a short-term economic outlook can be difficult, but in the end will increase your chances of success.

In The Odyssey, Greek hero Odysseus suffers trials and tribulations as he spent years trying to reach his home in Ithaca after the Trojan War. During his long journey, Odysseus faced turmoil as he was nearly thwarted by the siren songs which beckoned him to surrender to their beauty, but Odysseus knew their deception would cause him to crash his ship upon the rocks if he heeded their message. He was curious to hear their songs, but he also knew they would lead him and his crew to certain death. He therefore ordered all his crewmen to stuff their ears with beeswax and tie him to the mast so he would be able to hear their alluring songs without being able to act upon their tempting messages. When he heard their beautiful songs, he demanded to be untied--but his crewmen bound him tighter. Finally, after much temptation and toil, Odysseus triumphantly returned home to his wife and son.

Investors can learn a lot from this story. While the tale was written some 2,300 years ago, it remains strikingly relevant in the wake of what many call the “lost decade” and as Wall Street sirens sang the songs of buying and selling; selling and buying, and forecasters, market timers and stock pickers continued to prey on the unsuspecting.

One could capture untold wealth and riches with the ability to accurately and persistently predict the future; such is the temptation with stock picking, market timing and other forms of active money management. The allure of getting it right can be a powerful temptation, and with 24-hours news relentlessly singing their own particular siren songs to the investing public, many succumb.

The Dalbar Study has surveyed individual households for more than 20 years and has consistently found a startling and unfortunate fact: From 1990 through 2009 the S&P index returned 8.20% annually, but the average stock investor only made 3.17%, barely keeping up with inflation.

So what causes the disparity? Too often decisions are based on greed and fear--the classic buy high, sell low scenario. Heeding all the siren songs that appear in many forms in the investing world surely have played a part in this behavior.

The past few years has been filled with trials and tribulations for many investors, but those who kept their eyes fixed on the long-term reward of the journey and kept their wits about them have emerged better off for their valor, patience and discipline.

The market reached its most recent bottom on March 9, 2009. At that point, when things looked the gloomiest, and the financial media was telling us that the world markets were coming to an end, the rebound began. Not just any rebound, but one of historic proportions. The temptation was to panic and wait until “things settle down.” But those who globally diversified their portfolios, bought, held and rebalanced risk-appropriate, low-cost portfolios that kept fees low and styles pure, emerged from the last decade far better off than they started.

Like Odysseus, successful investors need to fill their ears with wax or tie themselves to the mast so as not to be lured by the siren songs of Wall Street touting the latest fad or promise. Investors should stick with what has proven to work: asset allocation, diversification, rebalancing, discipline, patience and having an investment plan that is tied to your long-term goals. The next time you see a headline or a talking head tempting you with a prediction or prognostication stay focused on what works and tune out the sirens.

Economist and student of the markets Jeremy Siegel of the Wharton School of the University of Pennsylvania School has memorably written, "Fear has a greater grasp on human action than does the impressive weight of historical evidence." This is nothing more or less than a realistic assessment of fundamental human nature. It isn’t that those of us who stayed didn’t feel the fear; it’s that in the end, we simply refused to act on the fear.

David is president of Huber Financial Group, which he founded in 1988. He is a certified financial planner with almost 30 years of experience in financial services. David has been honored as one of the area's top advisors by Chicago Magazine, and as one of the nation's Top Advisors by Mutual Funds Magazine. He is often interviewed in local and national media and is a regular guest of Steve Cochran on WGN Radio. Dave is a member of the Financial Planning Association [FPA], and the National Association of Insurance and Financial Advisors [NAIFA]. He has also served as a member of the advisory Board of the Schwab Advisor Network, and is a Life & Qualifying Member of the Million Dollar Round Table (MDRT).