Remember the Pain

Last Updated Feb 6, 2011 9:36 PM EST

Thinking back 23 months to the pain of the stock market plunge in March 2009, may offer opportunities for change and be the most profitable thing you can do for your financial future. At some point during our lives, or at many points, we all feel pain, whether it's physical, emotional, or some other. The silver lining is that we can learn from pain and allow it to direct our path in positive ways. For example, the pain in our wallets from an expensive traffic ticket can change the way we drive. The aches and pains we feel after flag football can finally hammer home the message that maybe we are too old to be playing against players half our age. I'm going to help you remember this pain and, later on, will tell you why it's so important.

By March 9, 2009, the US stock market had lost more than 55 percent of its value and international stocks had lost even more. Capitalism was declared dead and the only thing worse than the buy and hold strategy was rebalancing. Few wanted to get into stocks at that time, since there was no question that they would continue to decline as the economy worsened every day. Cash may have been "king," but it was fear that ruled.

The trauma of the plunge was evident even on the faces of seasoned investment pros and journalists. Our time tested paradigms of investing seemed to have failed miserably. The new "normal" that was established in the aftermath lowered the bar from achieving financial independence to hoping we could hold onto our jobs and homes.

Despite my assurances that everybody should stay the course and not be one of the panicky herd, I'll confess that I was in immense pain even as I tried to conceal it. Then, as stocks began a steep recovery in March and April, I began to feel better, or at least less bad.

A Bear to Remember
In May, I wrote an article for Money Magazine entitled "A Bear to Remember." The key lesson in that piece can be credited to the words of former White House Chief of Staff, Rahm Emanuel, "never let a major crisis go to waste."

And knowing as I do that investors have short memories, I urged people to write down how they felt. That way, they could pull it out to help them remember the pain when markets recovered, as they have countless times before. I wrote:

Ask a friend to keep you focused. Friends don't let friends drive their portfolios off a cliff. So give a copy of your investment policy to a pal or relative you trust, in an envelope marked: "Open when the S&P hits 1200." That way, when the next bull is raging and you're thinking of jumping into Russian Internet stocks, you'll be reminded of just how painful investing can be.
Back to the present
I had no idea the stock market would recover as fast as it did. As of Friday, January 28th, the US stock market was only 6.6 percent below its all time high, and 0.5 percent below the 2007 pre-crash year end close. Even the S&P 500 is at 1,307, far above that imaginary envelope marked "open when the S&P hits 1,200."

It's not a case of masochism or dwelling in the past, but rather that remembering the pain is every bit as important in making investment decisions as remembering how we feel when our investments are going gangbusters.

My advice
So in the interest of taking those sometimes painful life experiences and turning them into teachable moments, I have two assignments that may save your bacon.

  • Remember the pain. Find a quiet place and spend fifteen minutes thinking about how you felt in late 2008 and early 2009. Ask yourself how you reacted, maybe even going back to some investment statements to see if you sold some equity positions. Ask yourself if how you feel about risk today is the same as how you felt back then. More importantly, ask yourself if you will behave differently the next time the stock market tanks. If you are sure you will behave better, be particularly concerned.
  • Remember the pleasure. Take another fifteen minutes and write down how you feel about investing today, now that the stock market has virtually fully recovered. Put it in an envelope marked "open when the S&P falls below 900." Give it to a friend.
A method to my madness
I've received a bit of criticism lately for writing how the stock market has recovered and why I'm nervous about the market being overvalued. I swear I'm not trying to fill Jim Cramer's shoes, though he's often a source of ideas for my pieces. I'm merely trying to remind people that if they are keeping expenses and emotions at bay, then their portfolios should easily be at an all time high. I'm also trying to remind them of the pain and fear they may have been feeling not even two years ago, to get people to rebalance and stay disciplined.

Am I being manipulative? Perhaps, since here is what I told investors in early March of 2009, as the stock market bottomed out.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.