Do you remember what you were doing on August 5, 2011? Unless that date is your wedding anniversary or birthday, you probably don’t. And even though August 5, 2011 holds no special significance in my family when it comes to personal milestones, I’ll always remember that date because of a financial milestone… a milestone I’d rather forget.
This Day In History…
It was just five days prior that Congress and the President came to a late night compromise to raise the U.S.’s debt ceiling. Two days later, on August 2, 2011, the Senate passed the compromise, and President Obama signed it just hours before before the deadline. The deal prevented the federal government from defaulting on its loans, ensuring the government wouldn’t shut down and that its bills would be paid. When news of the last-minute deal first broke, just about everybody breathed a great big sigh of relief – it kept the government solvent, and more importantly, was expected to keep the markets stable as well.
Not so fast.
Three days after the deal was inked, Standard&Poor’s (S&P) downgraded the United States’s credit rating. The result? Market turmoil. When the markets opened on the morning of August 8, 2011 – the first full day of trading following the credit downgrade from AAA to AA+ – the Dow Jones stood at 11444.60; by the end of trading, it had plunged more than 600 points to 10809.85, marking the Dow’s lowest close in more than ten months. Today, nearly a year later, the Dow Jones is just now getting back to the levels where it was before the debt crisis.
And my investments have been caught in the middle.
My Dumb Decision
In the days and weeks leading up to the August 2, 2011 debt crisis deadline, I called my financial adviser almost daily to discuss strategy. We talked about whether or not we should put my IRAs (I have a traditional, rolled over from a 401(k) at a previous job, as well as a Roth) into more conservative holdings, as well as whether I should pull my stocks out of the market to avoid any turmoil.
In my heart of heart, I thought that selling my stocks was the best move. Last year, we filed in the 15% tax bracket, meaning I would have paid nothing in long-term capital gains taxes. The stocks – which we bought after the stock market hit rock bottom in March 2009 – were worth more than double what we’d originally paid for them. But when Congress and the President reached that deal, I figured my stocks would be safe.
I figured wrong.
In the days following the deal, I watched my holdings (which, I’ll admit, are limited at best; I’ve focused on investing in my Roth and my husband’s 401(k) instead of the stock market for the most part) tumble… and tumble… and tumble. At their peak just before the debt crisis resolution, my shares – divided up between five different companies in five different industries – were worth a combined $4,287.88. By October 2011, they’d dropped all the way to just over $2,300 – only $300 more than our original investment. Today, our holdings are still below their August 5, 2011 value at a meager $3,800.
Needless to say, I’ve spent the majority of the past year regretting my decision not to sell my stock holdings before the debt crisis really hit the fan. In the days between the Congressional resolution and the credit downgrade, I had a sixth sense that, even though a compromise had been reached, that America would escape the situation unscathed. Still, my stocks had already started to tumble, and I figured things couldn’t get that much worse… so I held, and held, and held, until I realized the folly of my ways.
My investment strategy has always been to keep my holdings – whether my stocks or my retirement accounts – long-term, not worrying about the day to day ups and down. For that reason, I’ve rarely altered my investments, preferring to weather the storm. My philosophy had always paid off… until last August. The result left me questioning the balance between my instincts and my actions. With the perspective of a year’s worth of recovery behind me, I’ve realized that sometimes, you have to follow your instincts, even if it means bucking your investment philosophy.
Reader, what’s your biggest stock market mistake? What have you learned from it?