A Year Later: Financial Lessons Learned

Well, it’s been a year since the collapse of Lehman Brothers and the wake-up to the financial system that not all financial institutions will be rescued.  A lot of news stories are focused on the aftermath of what’s transpired, so I wanted to give my personal view as well as some observations and lessons learned.

From a financial perspective, the last 12 months have been a real roller coaster.  Although I was not expecting the authorities to bail out every institution, I am surprised that as of today, Fannie Mae and Freddie Mac do not exist.  I no longer have my regular bank account at Washington Mutual since it no longer exists either, but instead my bank became Chase.  Come to think of it, all of my accounts seem to now be JP Morgan Chase, even though I’ve never opened an account or credit card there: Chemical Bank, Capital One Visa Cards, and WaMu.  At least they are still around and FDIC insured.  The annuity that I purchased in late 2007 (my most regretted investment ever) is with an AIG-subsidiary and thus far continues to pay.  I managed not to panic and pull all of my equity investments and rode through the two large dips in the market Nov 08 and Mar 09.  I did manage to put more money in the market at relatively low levels (around April 22) but the reductions of dividends has hampered this strategy.  Here are some personal lessons learned and observations in this real-time experiment:

–Sharp moves down do not equal sharp moves up — in other words, if you start with $100, lose 50%, then gain 50%; you;re only left with $75.  While the stock markets have recovered sharply from their lows in March, they are still substantially lower than at the peak about 13 months prior.

–Stock diversification matters — most of my index holdings have recovered nicely, especially those related to emerging markets; however, certain individual stocks are lagging.  Right now, I have some REIT holdings that have thus far lagged the market.

–Cash flow lags the market — with interest rates still at or near historic lows, dividend and interest payments are at their nadir and may stay that way for another 12 to 18-months.

–This cycle may be different — in particular, the employment situation in the US seems to have lagged previous cycles in recovering.  Although business orders, exports, and credit conditions have improved, the lack of employment growth signals to me a prolonged U-shaped recovery.  I will continue to invest heavily in international stocks, emerging market funds, and non-US$ investments, with a view that the risk is for higher inflation.

–Don’t give investment or personal financial advice to close friends — actually, I adhered to this and watched from the sidelines as a number of people leveraged up to buy real estate at or near the peak and take out some of these crazy option arms that accrete (sounds like a disease).  Unfortunately, rather than understanding that this is typical bubble behavior, most now try to rationalize why they should have seen this coming, making future large financial calamities, possibly Black Swans, likely to recur.

posted at this week’s Carnival of Personal Finance