Wall Street: Boom and Bust

In the 1980s I had just started getting involved in investing. I had a full time job, albeit a very low paying one, and I was determined to make the most of my money and see it grow. I was lucky that, unlike most of my friends, I actually enjoyed saving and investing and didn’t see it as any huge sacrifice. In fact, I looked forward to stashing away as much as I could every payday. 

Over the years my investment philosophy didn’t change all that much. That’s to say, it was never all that sexy or complicated. I contributed to a 401k at work, increasing my contributions as my salary increased. I invested in my first mutual fund in the early 90s and made regular deposits. Even today, the bulk of my investments are either in a 401K or stock index funds.           

During this time though I experienced all the exhilarating booms and excruciating busts served up by Wall Street and its players. And yet, here I am. Way better off because of what its taught me.

Black Monday         

In 1987, life was good…greed was good…until it wasn’t. As is the case with every boom ever on Wall Street, people started having doubts about things being too good and collectively, everybody lost their shit. In this case, everybody officially lost their shit on Monday, October 19th, 1987, forever referred to as “Black Monday”; the largest single day percentage loss in stock market history.         

On this day the Dow Jones Industrial average lost 508 points. Remember that at the time the Dow was only trading around 2,200 so the loss represented a 22% decline. Today the Dow trades at just under 26,000 so that same percentage drop would be the equivalent of losing 5,700 points. As bad as that day was though, the market did make a fairly quick recovery and went on to reach new highs over the coming years.

Dot-Com Crash          

Fast forward to the 1990s and the world was once again euphoric. The Internet was changing everything and new companies like Amazon, EBay, and E-Trade dominated the financial news. The NASDAQ 100, representing some of the biggest tech firms, was now the place to make your fortune.         

This time was different, the experts kept saying. The market was simply unstoppable because we had never seen anything as powerful as the Internet before. The possibilities were almost limitless. But of course, they were wrong.          Unlike the sell-off on Black Monday over a decade before, however, this sell-off occurred not on one day but over the course of 2 ½ years. During this time the NASDAQ 100 index fell 78% from its all-time high. For a little context, if you had $10,000 invested in the index in 2000, by October 2002 it would have been worth about $2,000.

Mortgage Crisis & the Great Recession         

This same overly optimistic scenario unfolded again in 2008 when banks thought it would be a great idea to offer all kinds of mortgages to people who had no way of ever repaying them. And the homeowners, in their race to the top of the debt pile, lined up with both palms open assuming, rather foolishly, that housing prices would always go up. They, too, were wrong and once mortgage defaults started to rapidly accelerate, investors again collectively lost their shit and it all came crashing down. This all led to the biggest economic downturn since the Great Depression and stocks again took a huge hit.

Long Term Mindset         

I point all of this out not to discourage you from investing in stocks or to make you paranoid about losing all of your hard earned money but to highlight the fact that investing has always been a series of booms and busts. That doesn’t mean you shouldn’t participate, however. Through the decades there has been no better place to invest your money in terms of overall returns. There’s one caveat: That you don’t try and time the ups and downs of the market by putting money in and taking money out based on what others are saying.         

Through every one of these painful losses I stayed 100% committed and didn’t withdrawal one dime from any one of my investments. I won’t deny that it was painful and hard to watch at times. But when it got too uncomfortable, I simply stopped looking. I focused on my contributions but quit looking at my account balances because nothing good would come out of it. They would be down, and down by a lot.         

Another thing I want to point out is that after every one of these crashes, the market eventually came back. Sometimes it took a few years but it did come back. The housing market crash, which led to the Great Recession, which in turn led to huge losses in the stock market, was about 10 years ago. And yet here we are witnessing the longest bull market in history with all stock indices again trading at or near all-time highs. But if you panicked and took your money out in 2008, you wouldn’t have seen any of those incredible gains.         

Will this time be different? I’m no fortune teller and neither are those on Wall Street who claim to be. But what I can tell you is that the market will eventually fall and when it does it will likely be by a fairly significant amount. That’s perfectly fine with me though because it’s all part of the process. You can’t get too excited during the good times and too down during the bad times. Over the long term you have to trust that it will all work out.


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