The Great Recession of 2007-2009

SERVING HOUSTONIANS AND SURROUNDING AREAS SINCE 2002

An example of short term trading, not price volatility, incurring risk.

The Great Recession started out as an economic slowdown that became a financial crisis due to the subprime meltdown resulting from poorly written loans for housing and credit cards.

Like many investors and their money managers I felt devastated and a bit panicked by the market meltdown. Some of my clients wanted to sell out, but I strongly advised against it.  I would not allow emotion to dictate my investment decisions. Two things I knew: the market had lost ten years of value and that was excessive; and, if the Federal Reserve (the "Fed") stepped in and shored up the banking system, we, both our country and our economy, would pull through.

The Great Recession is a good example of investors overreacting to stock price volatility.  Investors at the time believed that the sharp drop in stock prices over a short period of time meant that the economy would collapse. What investors should have focused on was whether or not the Fed would rescue the economy. Once it became clear that the Fed would provide liquidity to prevent bank failures, investors should have felt comfortable that the economy would not collapse. But they didn't. Instead, they continued to focus solely on stock prices with a majority of investors selling at those lower prices and not returning to the market, thereby experiencing significant losses and in many cases jeopardizing what would have been a very comfortable retirement had they remained invested.

The subprime implosion clearly demonstrates how investors can overreact to price volatility instead of focusing on the right facts and long term fundamentals.  In short, investors felt the price drop was the risk; but in fact it was their selling at the market’s bottom that resulted in risk

For more commentary look to our pages: The 24/7 News-info Cycle and Your Investments and Current Market Commentary.

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