Markets: Brutal lessons

Almost everyone lost out in the crash. Learn these lessons, and you’ll be fine next time.



From the November 2009 issue of the magazine.


There’s a new book out called The Great Depression: A Diary. As the title suggests, it’s one man’s account of living through the dismal 1930s. The diarist, Benjamin Roth, was a lawyer in Youngstown, Ohio. He was 37 in 1931 when he started to jot down his day-to-day observations.

It’s a fascinating read, and strangely familiar. Roth complains about the 1920s run-up to the Depression—the inflated real estate prices, the crazed stock market infected with greed. In 1931 he writes of the pain of watching people’s homes repossessed by banks. Two years later, Roth bemoans President Roosevelt’s New Deal program (the stimulus package of its day). He worries that massive deficit spending will drive up inflation. By 1937, Roth is beside himself. After a brief recovery in 1935-36, the economy is sinking back into a morass. He fears the Depression will never end.

It’s easy to feel like Roth today. A year after the market crash, we seem to be in recovery. Then again, economists are warning about a nasty double-dip just around the corner. If nothing else, we’re in for years of sluggish growth. Did we not learn anything from the past? Perhaps not as a society, but for individuals, the crisis of the last year has been packed with useful lessons:As you near retirement, there’s no substitute for money in the bank. The great American financial planner and author William Bengen once referred to two types of retirees: the “black holes” and “the stars.” The black holes are people who happen to hit retirement age at the start of a downturn, such as in 1929, 1946 and 1973. In some cases these people lost half their investments upon retirement.

The stars, on the other hand, are those who were lucky enough to retire during the early stages of a boom. Someone who retired in 1950, for instance, would have seen a return of 12.9% compounded over the next decade. The black holes didn’t do anything wrong, and the stars didn’t do anything particularly right. How they fared in retirement had a lot to do with dumb luck.

You can’t control what the market does after you retire, but you can control how exposed you are to its roller-coaster ride. That’s why as you get older, you should put a higher and higher percentage of your portfolio into bonds and GICs. Tom McCullough, president of Northwood Family Office, a Toronto-based adviser to wealthy clients, points out that an equity investor who lost 24% during the downturn would have suffered just a 9% decline if half of his money had been in bonds.Pay close attention to your investments. No one else will. One of the striking things about Roth’s Great Depression diary is his growing frustration with economists for not seeing the crisis coming or offering useful direction. Eventually he gives up, concluding that people need to do their own thinking. His advice is just as relevant today as it was back then. Before the crash, too many investors assumed their adviser would warn them and protect their money. And many were surprised to learn just how risky their investments were. If there’s one thing we’ve learned it’s you have to pay closer attention to where your money is invested. “You are responsible for preserving your assets. No one else will do it for you,” says Jim Otar, founder of

Sometimes there’s nowhere to hide. If you were invested in the stock market last year, you lost money. It’s that simple. So don’t beat yourself up. Even value stocks and high-yield stocks, which have provided some shelter in past bear markets, didn’t do well this time, says Norm Rothery, chief investment strategist at Dan Hallett & Associates. Uncharacteristically, the stocks that did the best were growth stocks and dividend growth stocks. Not that those provided much solace either. While value stocks crashed by 62% and high-yield stocks by 57%, growth stocks still dropped more than 46%.

Sobering as that last point may be, there’s room for optimism. Consider Roth. Sure, he endured the Great Depression, but by the time he died in 1978 he’d witnessed the great post-war boom too. So relax. Just as all economies crash, recessions, no matter how great they are, eventually pass.

37 comments on “Markets: Brutal lessons

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