4 Lessons From A Stock Bubble

A decade after the dust settled in the bubble of 2007, some lessons may still surprise you.

Reviewed by: Allan Roth
Edited by: Allan Roth

Nearly 10 years ago, on Oct. 9, 2007, the stock market hit a historic peak. Times were good, and few could have guessed that an epic plunge was on the horizon.

It was unthinkable that Lehman Brothers or GM could go under, or that real estate could nose-dive on a national level.

Hindsight being 20/20, there are some lessons gained that might not have been so apparent in the few years that followed the crash.

1) Capitalism works.

If you had the worst timing in the world and bought $100,000 of Vanguard Total Stock Index Fund (VTI) on that day, you would have received a 101.9% return as of Sept. 22, 2017 and now have $201,900 by doing nothing other than letting your dividends reinvest. It really is true that time in the market is far more important than timing the market.

2) Rebalancing works, too.

On March 9, 2009, the market bottomed. Had you bought the same fund then, your return would have been 353.3%, and your $100,000 investment would now be worth $453,300. Few can time things this well, but one should buy when stocks are on sale, as I advised back in March 2009. Unfortunately, advisors showed poor timing.

3) Economic news and stock performance are different.

Unlike 2007, the economic news was bleak and painful in late 2008 and early 2009. That was, of course, the time to bulk up on stocks. Warren Buffett was right in saying, “Be fearful when others are greedy, and greedy when others are fearful.”

4) No one knows the future.

It’s true that economist Gary Shilling predicted the 2008 plunge with uncanny accuracy. After he became widely known, many followed him in 2009, when all 13 of his forecasts were wrong, including a stock rebound when he predicted a further plunge.

Applying These 4 Lessons Today

Capitalism not only survived, it thrived, and will likely continue to survive over the next few decades as well. Ignore future “new paradigms,” as they will cost you.

Pick an asset allocation you can live with. You should be selling when markets hit new highs, such as they have been doing recently. Don’t mistake the recent good economic news as signaling more stock gains are on the way. If anything, I consider it a bearish signal. Remember that no one knows the future.

Another fast approaching anniversary is the 30th anniversary of Black Monday, when stocks lost 22.6% in one day. If you think that can’t happen again, don’t. Instead, prepare yourself to stomach such a loss. Better yet, buy more stocks if it does.

At the time of writing, the author held VTI. Allan Roth is the founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for the Wall Street Journal, AARP and Financial Planning magazine. You can reach him at [email protected] or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter

Allan Roth is founder of Wealth Logic, an hourly based financial planning and investment advisory firm. He also benchmarks portfolio performance for foundations and other business concerns. Roth's website is www.DareToBeDull.com. You can reach him at [email protected] or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter