4 Market Crashes, 5 Lessons On Risk Tolerance. And 1 On Life.

I have had the dubious pleasure of investing through a number of market crashes over the years. Each one has taught me something about my risk tolerance, and I hope that the lessons I have learned may be helpful to you. If only to show you what not to do.

I decided not to present each past market drop chronologically, but rather to discuss each drop in terms of my personal risk tolerance, from least to most. Please keep in mind that, of course, your risk tolerance will change depending on your age and life circumstances.

1. The Dot-com Bust

At the time of the dot-com bust (March 2000, for those who might not have been old enough to notice at the time), I was in medical school, relying on my investments to cover the costs of living.

I distinctly remember working out at the school gym, and watching MSNBC as they reported on the steep drop in the stock market. I thought to myself: crap, there go my living expenses.

The wiser me of today looks back and sees that I was keeping money that I needed in the short term (to pay for rent and groceries) in an investment meant for the longer term. Stocks were described, at the time, as being suitable for a 3 year investing horizon. People nowadays are suggesting a 5 year horizon, as in: if you need the money in 5 years or less, don’t put it in the stock market. Relying on money invested in the stock market for short term needs represented a gross error in my asset allocation.

Had I had a year’s worth of spending safely in cash, or cash equivalents (back then you could actually get reasonable rates on CDs), my risk tolerance would have been much higher. That is to say, I could have kept the rest of my money in the stock market, without any concern about whether the NASDAQ dropped 78% or not. Because I did not have that safety net, I had very little risk tolerance. I needed that money and could not tolerate seeing the market drop.

Lesson learned: money you need soon doesn’t belong in the stock market. Put another way: cash in the bank gives you a nice cozy armchair feeling of security. Only with your back protected (or your rent covered) can you feel more comfortable with aggressive investment allocations.

2. The Great Recession

In the years leading up to the Great Recession, I was doing well: a single woman, making attending money as an outpatient PCP. In 2007, I was busy at work, making good bonuses, and doing very well financially.

I was living in a nice apartment, probably the nicest place I’ve ever lived on my own; I had fulfilled my short term post-residency financial plans (a new phone and a new-to-me car); and had started to splurge a little bit on travel. I was saving money regularly in my 403(b), investing in stocks in a taxable account, and also putting money in a 529 plan for my only nephew. I had a lot of cash saved for an eventual down payment on a house.

Then 2008 rolled around.

Two months after Lehman Brothers was let fail in September, I was in a new job, having just spent a ton of money moving . The economy was going down the toilet and I was the last person hired (aka, usually the first person fired).

Doom and gloom was in the air. Everything was changing, and it seemed none of it was for the better.

I wasn’t working very hard (in primary care, your workload is usually pathetic the first year or two of practice), and I clearly was not earning my salary. I was convinced I would be let go, though my bosses assured me otherwise.

Despite my fears, I carried on with contributing to my 403(b) every month, as soon as I was allowed to.

However, I didn’t have the confidence to put money into my nephew’s 529. I did not want to put in my once or twice year contribution, and then kick myself as his account lost 20 or 30%. I didn’t want to ask myself: you dummy, why didn’t you just keep it in cash? It took a while for me to feel comfortable contributing again, and I suspect I missed out on investing at the market bottom for him.

Every time I checked my taxable investment account, it was dropping. I didn’t contribute there for a long time either.

During this time, at least I still had a nice cash cushion (my house down payment fund), though I didn’t think of it as my emergency fund. After all, in my mind it was to buy a house. Nevertheless, every time I checked my account balances, at least I had one account that wasn’t falling.

I learned 3 lessons from this crash.

The first lesson, which I keep repeating to myself now, is not to check your investment totals. All it did, back in 2009-2010, was give me anxiety. This anxiety kept me from investing for my nephew’s college costs at a time when I would have gotten some of the best returns possible.

The second lesson, is that with the safety and confidence of gainful employment and an emergency fund (as I had then), I could manage a higher risk tolerance than I could in 2000. Put another way, my human capital allocation (my ability to work and earn a paycheck) was strong, so that I could manage more risk with my investment capital.

Many years later, I could look back and wish that I had had the confidence to put more money away for my nephew in 2009. But, as they say, hindsight is 20/20. I did not have the stomach for it back then. My last lesson, though, was to plan to invest in college funds for him and his cousins the next time the market crashed.

3. Black Monday (October 1987)

I approached this crash with a sense of security born of youth and privilege.

I was a very young adult, still supported by my parents, which meant I could afford to lose money with very little repercussions. Of course, I would be very upset to lose money I had saved up over years, but really, the stakes were relatively low. I would still be able to eat, have a roof over my head, and go to college. You could say my risk tolerance was nearly infinite.

So when the stock market dropped by 22%, I had the luxury of seeing this as an opportunity to buy a stock on sale. With my father’s help, I bought one company, whose price was most certainly on sale, and which is currently selling for about 16-times the purchase price. (At second glance, this might somewhat less impressive than it seems, since the value of a dollar in 1987 is about $2.27 today. But still, it’s a nice return.)

Overall, this wasn’t a very big investment, as I was young, and didn’t have much saved from my summer jobs.

The lesson here is that you really can buy stocks on sale. Also that your risk tolerance can be high if you don’t have any real responsibilities.

4. Today: 2020 and COVID-19

All of this brings me to now.

In the past 3 months, the stock market has been all over the place. Evening news reports talk about the biggest loss the Dow has ever seen, followed by huge 1-day gains, followed by another huge loss. Etc.

I’ve learned my lesson from the dot-com bust, and I have plenty of cash put away. I have an emergency fund, in case I lose my job, and a little more to take care of those irregular costs (like property taxes, and car insurance). I do not have to rely on my investments to pay rent or for groceries.

I’ve learned my lesson from the Great Recession, and I am not looking at my investment portfolio valuations. I don’t need that sort of anxiety, on top of all the other anxiety that comes with dealing with a viral pandemic with an unclear fatality rate and no successful treatment (for now).

However, since I am still working and drawing a salary, I continue to invest monthly; through dollar cost averaging, I am hoping I will come out ahead in the long run (Physician on Fire has a nice post explaining why a bear market can be good for investors). My human capital lets me run a higher risk tolerance.

Remembering my regrets from 2008, I am planning to throw some more money in the 529 plans for my niece and nephews.

Additionally, I have been feeling secure enough to offer support for others, which is really a new situation.

My brother has been out of work, and I have been able to send tablets for his kids; these have been great for school work for the eldest, and circle time for the younger ones, who are missing preschool.

As for supporting others, I am very proud that my department has been raising funds for our local food bank. I made an extra donation last month, and will make another this month; I think the total will be pretty awesome.

Two lessons (so far) from this pandemic and stock swoon:

One. My risk tolerance now, while I am still earning a good living, is high. Assuming that we all get through this disaster, I may have plans to cut back more, or even retire, before the next bear market comes along.

Under those conditions, my risk tolerance will be quite a bit lower.

In the next few years, as the stock market recovers, it may behoove me to move some of my portfolio into less risky investments (bonds and cash). We will see if I remember to do this in 2022 or 2023.

Two. This pandemic has been a reminder that money really isn’t everything. Even with plenty of cash, I can’t assure myself or my family of safety, health, or even happiness. However, I can be generous, and help those who need a hand, whether family or just people in my community.

That is always a lesson worth remembering.

Were you investing through some of these crashes? What lessons did you take away from your experiences?