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Know Your Investing & Market History

I was reading an article the other day (I about the importance of paying attention to your asset allocation mix, rebalancing, the usual exciting investment stuff, when I stumbled upon this passage (third paragraph):

Not to scare you, but that’s a risky situation. If one of your largest asset classes should take a sudden fall – the way emerging markets plunged nearly 60 percent between 1997 and 1998 – your returns will go into a tailspin along with it. [link [3]]

The “not to scare you” part is in reference to advice that you shouldn’t let an asset type, in this case emerging markets, get too large without rebalancing to reduce, or at least spread out, your investment risk.

While that in and of itself is sound financial advice, the most significant idea I got out of reading that article was that I don’t know much about the history of the markets. My investing history is exceptionally weak. By investing history, I mean all the swings, bubbles, bursts, run-ups, corrections, crashes, etc. in the stock market, bond market, housing market, and other various markets and as a result, I’m doomed to follow the “sky is falling” mentality of mainstream media. My investing history is limited to the big ones like Black Monday back in 1987 and the trivia ones like the tulip bulb craze in the 17th century [4], but I had no idea emerging markets crashed 60% between 97-98. Did you know that the peak of the dot com boom to the trough of the burst lasted 929 days?

Do yourself a favor and check out this great resource by Fortune [5] in which you can view the performance of the markets over the last 50 years? Spanning the top are the Presidents and Fed Chairmen and the chart reflects the performance of the markets along with periods of bear markets and recessions. It’s a superficial look but it’s a jumping off point.

If you see any periods that look especially interesting, such as the 20% drop that started in the summer of 1990 and ended in the fall, start doing research to see what caused it, how people reacted, etc. What’s especially interesting is now you can read the archives of many popular newspapers such as the New York Times, you can read the sentiment of the writers and the public by scanning the archives. Panic and irrational reactions aren’t 21st century creations, they existed back then too (much like irrational exuberance!).