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Lessons learned two years later

This week marks the two-year anniversary of the stock markets hitting rock bottom.

On March 9, 2009, the Dow dropped to 6,500 and the S&P 500 fell to 675.

At the time, the major media outlets told us it was time to run for the hills ... sell it all ... this is the end.

Obviously, that did not happen. In fact, the Dow and the S&P are now double what they were in March 2009. While that is great, hindsight is 20-20. More importantly, what have we learned since then so we won't hurt ourselves in the future?

1. Journalists and TV personalities exist to sell advertising and ratings. They are not asset managers looking to give you the best advice possible.

2. The 100-year flood seems to be happening with great regularity. Routinely, we hear "experts" say the chances of something happening are about the same as the 100-year flood - meaning it has about a 1-percent chance of occurring this year. Experts, and their predictive models, can be widely inaccurate. From a planning perspective, it is far more important to do your own, very conservative, assessments.

3. Whenever excesses occur such as the tech/Internet, oil or the mortgage bubbles, people get lulled into the sense that we are in a "new norm." It is different this time, and I better jump on the bandwagon for fear of being left behind. Whenever someone tells you "it is different this time" you should be very cautious.

4. Wall Street is famous for financial innovation. These financial products usually come with large commissions attached to them and a slick sales pitch that makes them seem bullet proof. The fact of the matter is that while many of these products can be tested in a laboratory or academic environment, they do not anticipate the realities of the world and human behavior.

5. Be careful when listening to ratings agencies. Standard & Poor's gives its highest rating of AAA to a mere four companies. Given that there are more than 5,000 companies that trade publicly, the AAA rating is rare. However, companies pay ratings firms, such as S&P, to give ratings to a variety of financial products. It is amazing to see the number of products, such as packages of sub-prime mortgages, which were given AAA status by S&P or Moody's.

Why would they do this? Simply because they were paid handsome sums of money to do so. If you will follow the money, you will often see people's true motives.

6. Debt kills. Whether our bloated government, a publicly traded corporation or your own household, debt can kill. When everything is working perfectly, debt can enhance returns. However, things never work perfectly. As such, debt should be used sparingly and conservatively. Understand that if the economy hiccups, you lose your job, you get sick, etc., the burden of debt can be a death spiral. Once you start downward, it is often impossible to climb back out.

7. Short-term needs should be invested in such a manner that they incur no return of principal risk. It is foolish to try to get an extra 0.1 percent return, if it brings with it the potential of a 10 or 20 percent loss.

8. The best investors truly have a long-term focus. Long term, in our opinion, is 10 or more years. If from March 9, 2009, investors simply hung in there, their portfolios should have significantly rebounded. If they added to their investments during this time period, they did even better.

Dave Sather is a Victoria certified financial planner and owner of Sather Financial Group. His column, Money Matters, publishes every other Wednesday.

Author: Dave Sather

Originally published Wednesday, March 09, 2011

Victoria Advocate