Lessons Learned from the 2008 Recession

“After all, you only find out who is swimming naked when the tide goes out” Warren Buffett

Real estate, investing, and cash, my biggest lessons of the 2008 and 2009 recession.

In 2008 and 2009 we had one nasty recession. Watching banks like Bear Sterns go under while the stock market was going down 700 points seemingly every day was a wild ride. At the time, my wife and I had a townhome in New Jersey and had set in motion a plan to move to Dallas, Texas.  She had gotten a really good job offer and I worked for a company that allowed telecommuting so I had a lot of flexibility.

We put our townhouse up for sale about 2 months before the shit hit the fan, and it sat on the market. So here we were, right in the beginning of the housing meltdown, we had a townhouse on the market while simultaneously paying for rent for an apartment in Dallas. Then there was the anxiety of this time which fueled by the media and strengthened by observations around us such as friends and colleagues being laid off and people we knew being underwater in their homes. Not fun.

It ended up taking 9 months to sell the townhouse (while paying for an apartment) and even though we made some money on the sale of the townhouse and kept our jobs, the extreme nature of this downturn opened our eyes to some personal finance vulnerabilities.

2008-2009 Recession Lessons Learned

It’s hard times like this that test your principles and stamina.  This downturn was the best teacher anyone could have asked for, it highlighted weaknesses in several places and motivated my wife and I to make changes to improve.

Looking on the positive side, this particular recession was invaluable in opening my eyes to the importance of developing a strong financial plan. It exposed weakness and motivated me to work hard to improve both personally and financially.

Downturns are cyclical and will continue to happen. When the next one does, I’ll know what to expect.

1. Real estate lesson 1: Should have been more aware of the housing bubble signs around me and listed my house cheaper from the onset. If my wife and I listed our house cheaper (which was recommended by our agent) we would have had a higher probability of selling sooner, thereby saving us 9 months of mortgage payments in addition to paying for a two bedroom apartment.
   
   Action: If I find myself in this position again, then I need to find a good real estate agent that knows the market well. Make sure they know if you have the luxury of time or are trying to sell fast. In my experience, a fast home sale means pricing lower than if you have the luxury of time. Weigh the idea of paying two mortgages or a mortgage and a rent over a long period of time versus selling quicker for a less money.
   
   
2. Real estate lesson 2: over leveraging. I personally did not have this issue but I saw it all around me. A lot of folks had low percentage equity ownership in their homes, and when real estate prices dropped they had underwater mortgages (that is, their home was valued less than their remaining mortgage loan). I knew a couple that needed to move due to a work transfer, and they ended up paying the bank about $30,000 after the sale of their home, and this was 2014, years after the 2008-2009 recession!
   
   This was crippling to many, and even though I didn’t experience it personally I internalized it in my own way. Bottom line, I’m not a savvy high leveraging real estate tycoon, I don’t like debt and realized the next home I buy needs to have a higher percentage down payment and plan to pay off the mortgage, or stick with renting, which isn’t bad either when you run the numbers.
   
   Action: When my wife and I bought our current house in 2010, we put down 40 percent of the asking price.  We knew we wanted to pay off the mortgage early, and the thought process here was to make a big down payment (definitely avoid PMI), thereby lowering our monthly payment, and rely on our jobs and discipline to save up money. In 2010 I remember thinking that we shouldn’t even try to pay off the mortgage for at least 10 years. It ended up being paid off in 8.
   
   
3. The media: I have been reading financial news and blogs since the late 90’s.  There are always so called expert opinions in the media or online about the various corners of our economy that could fold and lead to the next Great Depression.  Some of the ideas out there are actually pretty convincing. Others no so much. While I can recall reading some (maybe 1 or 2) articles about a coming housing crisis, those one or two articles were floating in a sea of other negativity out there like war, terrorism, national debt, immigration…you get the idea. In other words, I did not and still do not have the wherewithal to pluck out one of the negative ideas from the negative idea ocean generated by the major media outlets, and then take meaningful action to avoid some ensuing downturn. I still read more articles and blogs than I care to admit and there’s no shortage of negative news no matter how good or bad the market. Put another way….you can’t time the market.
   
   Action: Create a strong financial plan. The financial plan provides the basis for why you do what you do. It keeps me from making undisciplined knee jerk reactions to negative news or someone else’s hype. My financial plan takes into consideration my risk tolerance and time horizon and is revisited regularly enough to make adjustments over time.
   
   
4. Savings: I had a big savings imbalance going into 2008. The good news: I was saving for retirement by maxing out my 401k. The bad news: this retirement savings was probably 90 percent of my overall savings. I didn’t have much in the way of cash, not the 3 to 6 months of expenses most advisors recommend. I realized that if I had lost my job or something else that required fast cash, I would have had to tap into retirement accounts with all the taxes and penalties.
   
   Action: As part of my financial plan, I buckled down and started coming up with a better, more balanced savings strategy. I made up some aggressive cash savings goals and then focused on controlling spending to reach those goals.
   
   
5. …greedy when others are fearful: we’ve all heard the advice from folks like Warren Buffett who said “Be fearful when others are greedy and greedy only when others are fearful.”.  I saw the Dow drop so much during this time while the media fueled the anxiety, it was pretty intimidating. I recall reading negative articles practically every day, headlines like: “10 reasons why the market is going to stay down forever” or “5 reasons why you lost all your money and never will make it back again”.
   Then somewhere in the depths of this downturn, I was watching CNBC and they were reporting that Warren Buffett had made a sweet, multi-billion dollar deal with Goldman Sachs.  Basically he invested $5 billion and in return he received preferred stock with a preferred dividend. In just a few short years he made that money back and then some. He actually did what he preaches.
   
   Action: Definitely the best knee jerk swing for the fences action I’ve ever taken. Most of us can’t go in and make deals like Warren did with GS, but I was so inspired by this move that on that same day, I put down $5,000 on Citigroup for about $1 a share. It was the best single stock investment I ever made. It went up over $4 per share, at which time I actually had the sense to sell some shares to recoup my initial investment and fees. I then let the rest run for a few years.  It ended up being a great stimuli to my beat down finances at the time.
   
   
6. Things on sale: prior to a recession things are priced at a premium and deals are tough to find, relatively speaking. This changes during a recession and things that were priced high, non-negotiable, or not available are now available at lower prices or open to negotiation. During the 2008 recession, I was mostly concerned about building up more cash, selling my townhome and keeping my job. Besides my Citibank score I really didn’t take advantage of any other opportunities.  This lesson was more apparent years after 2008 when real estate prices started to rise, and in the job market salaries rose and new job opportunities became available.
   
   Action: Stick to my financial plan with or without a recession, but when a recession hits, look for things on sale.  It could be a good time to buy a second home, downsize into a cheaper home, renegotiate debt, negotiate anything for that matter. As I write this post in March 2019, we’re probably 10 years into a bull market. My wife and I decided to eliminate all debt, increase our cash reserves, and reduce spending in several areas.  Our goal for the next downturn is to have enough cash on hand to take meaningful action as opposed to buckling down and hoping for the best like most people.
   
   
7. Job outlook: large companies don’t let a good downturn go to waste. They look for low hanging fruit, people with bad performance reviews, not working well with others, not hitting their goals or metrics, and cut them loose.  It could even be something as petty as settling a score with someone that pissed off a senior manager. Whatever the cause, the downturn gives companies the best reason to let people go, all they have to do is say, “with the economic conditions, we are no longer as profitable, blah blah blah, and can’t afford to carry the same staff, therefore we will have reductions in force”.  This gives the company a lower probability of getting sued should the laid off employees file a law suit. If you think you’re at risk during normal times, watch out during a downturn or correction.
   
   Action: focus on those annual reviews, make sure you’re viewed as a high performer. Don’t make it easy for them to lay you off. Regardless of your individual performance or standing, it’s a good time to update your resume, go after that certification you’ve been neglecting,  go on a self-improvement run and get networking. The job market is likely to get flooded with lots of applicants during a downturn. Even though you may be more qualified than others, there are always people that can write a great resume and present well in an interview. Make sure you are the best, most marketable version of yourself.
   
   
8. Index investing and diversification: with the exception of my Citibank score, this is about the time I stopped investing in individual stocks. I’d had enough of swinging for the fences, and began to develop my own plan for building wealth.
   
   Action: the recession reinforced why I need to stop playing hedge fund manager, and stick to what works for investors like me, mostly index fund investing.
   
   
9. Anxiety all around: I remember speaking with my Dad at some point during the downturn, and I made it known that there were layoffs and underwater mortgages, etc. He made the comment, “… but those things aren’t happening to you”.
   
   Action: Dad  was right, but even so, the anxiety of the day will get to you if you let it. Don’t. Focus on yourself and your own self improvements and you’ll be much better off.
   
   
10. Rebound: I remember this one phrase that was repeated by many folks around me, it was “…in this economy”.  Could be a conversation about jobs, investing, price of gas, whatever the case the sentence began or ended with the words “in this economy”.  I didn’t notice it at first, but eventually I didn’t hear that phrase anymore. The economy didn’t exactly come roaring back after the 2008-2009 recession (at least that wasn’t my perception) but it did come back. If you listened to the endless ramblings of bad news and ‘sell your investments articles’, you would have done really bad. If you stuck to your guns, you would have done well. If you stuck to your guns and invested through the recession, adding money to your investments while they were down, you would have done really well.
    As I pointed out No. 3 above, the media throws gas on the fire and creates anxiety.  During the next recession, I think I’ll just tune out and ignore them completely.
    
    Action: Ignore the media, bad news sells so don’t buy it.  Find a hobby, start a blog, read a book, but don’t give in to the hype.
    
    
11. Financial Plan: This is where I really focused on risk tolerance and time horizon as main cornerstones of my financial plan. In 2008 I knew my time horizon was over a decade, so I didn’t sell at the bottom. I kept investing in my 401k and saved wherever I could. The only regret I have is I wish I had more cash to deploy while the market was down.
    
    Action: write down a financial plan, focus on time and risk.  For me, cash, I needed a long term plan to get my cash balance higher.
    
    
12. Bonus lesson…Foreign markets: This is not what I would consider an actionable lesson, but an observation to be tucked away and pondered. When the US economy was down, there were other countries that seemed to fare better.  Brazil, Australia, China to name a few, all did well relative to the US at this time. When I look at countries that are doing well now relative to the US, I see: Norway, Switzerland, New Zealand to name a few.
    
    Action: If this sounds like a market timing thing, it is. I personally admit I don’t feel comfortable shifting my money into say, index funds with heavy weighting in what I perceive to be better economies with better economic outlooks than the US. But, it’s worth noting for now for future consideration, that if you could do this, it would help protect your downside risk during a bear market. Something to think about…