Personal Finance

2 Lessons Long Term Investors Can Learn From the Recent Stock Market Plunge

Expertise: Personal Finance, Landlording & Rental Properties, Personal Development, Real Estate Investing Basics
38 Articles Written

Fall 2008. Hurricane Ike left most of Houston with no power for two weeks. So the stream of news came mostly through the tiny screen of my Blackberry:

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  • Government takes over Fannie and Freddie.
  • Bank of America takes over Merrill Lynch.
  • Lehman Brothers is bankrupt.
  • AIG is taken over and bailed out.
  • Washington Mutual is closed by regulators.

And on and on.

Our morning routine during those troublesome times included three steps:

  1. Get out of bed.
  2. Turn on CNN.
  3. Wonder why we got out of bed in the first place.

It was brutal. We were being fed bad news and fear out of a fireman’s hose with our permission!

Then one day in 2009, we decided to permanently withdraw that permission. We have not watched cable TV news since, and I have to say, it’s one of the best decisions we have ever made.

Related: 5 Ways Real Estate Wins Big Where Stocks Fall Short

Stock Market Aneurysm

I told you that story because earlier this week, the stock market had one of its “mental breakdowns” again, and it reminded me of those days. Minutes after opening, the Dow dropped 1100 points after having dropped about 1000 points the previous week. Then it recovered about half those losses a few hours later. But it didn’t matter—the rollercoaster ride had whipped the country into a frenzy and had them glued to CNN/Fox/MSNBC.

As frightful as that may have been, I believe there are two crucial lessons long term real estate investors should learn from the latest stock market slide.


Lesson 1: Go on a LID (Low Information Diet)

Nota bene: If you are a long term investor, there are absolutely zero reasons why you should check the stock market on a daily basis and listen to talking heads pull predictions out of their posterior. Furthermore, what the stock market does intra-day should have no bearing on your decision making whatsoever.

Think about it—the “information” they are peddling leads to just three possible outcomes:

  1. You become so fearful that you sell at the worst possible time (don’t do it!)
  2. You become so fearful that you freeze and stop taking the actions your long term strategy requires
  3. Or you become so speculative that you buy more in anticipation of a bounce.

None of those decisions are aligned with the long term investor’s credo that your investment decisions should be guided by a long term overarching strategy. Trust me on this: Decisions made under the influence of fear never bode well for the investor making them.

To borrow a phrase from Tim Ferriss’ excellent book The 4-Hour Workweek: ‘Choose to go on a “low information diet.”’ You will be happier and will make better decisions. For the love of all that is holy, turn off cable news and spare yourself the drama. Check your stock portfolio monthly—let the ups and downs even out as they inevitably do without frustrating you to no end.

But wait a minute, I hear you say, don’t we have a duty to be informed citizens? Think about the last time you went on vacation. You probably ditched the cell phone, didn’t check the endless stream of “news” every 5 minutes, and what happened? Did the world end because you failed to be “informed” about the latest outfit the Kardashian sisters wore?


Lesson 2: Stay Disciplined

Mark Cuban once said, “Everyone’s a genius in a bull market.” As long as the market is going up, you click a button to buy some stock or sign a stack of papers to buy a property and just watch it rise. That takes very little discipline. The mettle is tested in volatility. Can you stick to your plan when CNBC is telling you to get in a fetal position and don’t change that dial? That takes discipline. Can you pull the trigger on your acquisitions when everyone else is on “wait and see” mode? That takes discipline. Can you hold onto your assets in a less than favorable housing market instead of panic selling? That takes discipline.

Related: Are You Still Picking Stocks? You Are Ridiculous. Here’s Why.

A few months ago, I was meeting with a new client in my office. He wanted to invest in real estate long term to achieve financial independence in 12 years. After I went over the strategy I would use to achieve that goal, he looked puzzled, bordering on skeptical. “This makes perfect sense,” he said, “but it’s almost too simple. If it truly is so simple, why isn’t everyone retiring with over a million on paid off real estate and six figure incomes?”

While I understand the skepticism, the answer to his question is also simple. The strategy is simple—its execution is not easy. Investing in real estate long term requires tremendous discipline in the face of adverse conditions and laser focus.

When adverse conditions condition your thinking (see what I did there), stay disciplined. Take out your written list of goals (if you don’t have one, now you have homework) and review it. Stay focused on your long term goals and take action according to your long term strategy. If it calls for acquisitions, purchase. If it calls for debt deleveraging, pay down those mortgages. If it calls for liquidation, sell. But don’t do any of those things under the influence of fear mongering.

Do you watch the news every day? How did the recent stock market activity affect your investing actions?

Let’s talk in the comments section below.

Erion Shehaj helps successful professionals achieve financial independence using the Blueprint Real Estate Investing™ strategy. By combining the principles of robust financial planning with quality real estate investments, Erion shows ordinary people how to replace their salary with passive income and retire early to live life on their terms. Over his real estate career of 13+ years, Erion has helped his investor clients purchase $90M+ in real estate assets to build robust real estate portfolios and streams of passive income. In addition, Erion has been involved in successfully rolling out small multifamily new construction projects across Texas. Erion has written extensively about long term real estate investing and business in several publications like BiggerPockets (since 2013), Investing Architect, American Genius, Geek Estate and more.

    Curtis Bidwell Rental Property Investor from Olympia, WA
    Replied about 4 years ago
    Erion, Thanks for your much needed perspective on the market’s volatility. I agree with your premise and have experienced the ups and downs of the RE market. I bought a lot in ’03-’04. We continued to buy into ’07 and then experienced the meltdown! We were glad to take advantage of the upside equity growth while it was there, but had a strong cash flow position that helped us weather the crisis years. But a well informed investor that knows his market will know when a good deal is to be had due to a change in market conditions. I have been watching a particular stock for some time and had several buy orders in over the past few months that were never executed. But when the market took a dive this past week I was able to get in at a good price and experienced a 12% gain for the week! I don’t promote market timing or ‘day trading’ but, We can do the same with RE as we watch the trends and take advantage of opportunities. I would agree that this doesn’t happen by watching the hype of the daily broadcast that constantly changes based on emotions of the moment. But more through reading solid RE and economic articles that give substance and context to what is happening. Thanks again for your perspective!
    Erion Shehaj Real Estate Broker from Houston, TX
    Replied about 4 years ago
    Thanks for your kind works. You make some great points – a seasoned investor has the experience to recognize when there are great assets to be had at discounted prices regardless of the asset type. I would add that while long term investors SHOULD seize great opportunities when they present themselves, they SHOULD NOT only invest when such opportunities are present. That’s when you cross over from “long term investor” to “opportunist”. Nothing wrong with either but imho every investor should know where they fall in that spectrum. Thanks again for reading and commenting
    Rodney Kuhl Rental Property Investor from Fishers, IN
    Replied about 4 years ago
    Nice article and good reminders to us all, thanks!
    Andrew Syrios Residential Real Estate Investor from Kansas City, Missouri
    Replied about 4 years ago
    I think lesson 1 is probably the most important (with the exception of BiggerPockets of course). Read books and look at the long term. There’s just way to much media out there to drown in and become overwhelmed by, especially since all these outlets like to go with the “if it bleeds, it leads” mentality. One would think the world is falling apart by just following the headlines, when in reality, most things have gotten a lot better.
    Erion Shehaj Real Estate Broker from Houston, TX
    Replied about 4 years ago
    @Andrew Syrios Absolutely! None of us are advocating for delusion but we should be aware of the business the news media is in (hint: it is not NEWS) 🙂
    Douglas Skipworth Rental Property Investor from Memphis, TN
    Replied about 4 years ago
    Great closing comments! They remind me of one of the most important reasons I am a part of BiggerPockets community. Surrounding oneself with like-minded investors is a great way to maintain the accountability and support we need in those times when our fears start to get the better of us! Thanks for the article.
    Erion Shehaj Real Estate Broker from Houston, TX
    Replied about 4 years ago
    I am glad it was helpful Douglas. Believe me, at times I write these things to conquer my own fears. 🙂
    Anthony Gayden Rental Property Investor from Omaha, NE
    Replied about 4 years ago
    I know a lot of people who sold when the market went down recently, and bought back in after prices started to normalize. Of course I tried to explain to them that they had just locked in their losses, but they insisted that they were doing the right thing, and seemed to be oblivious to that fact. These are guys with 15+ years until they retire.
    Ciprian L. Real Estate Agent from Burbank, California
    Replied about 4 years ago
    That’s why the average 401k balance is below 100k. Very easy to make mistakes like this.
    Erion Shehaj Real Estate Broker from Houston, TX
    Replied about 4 years ago
    That’s exactly right Anthony and Ciprian. It’s the very reason why the average portfolio returns 3-4% (according to Dalbar study) when the average return for major indexes has been in the 8-9% a year. And Anthony, I meet with those folks on a regular basis to figure out a way to make up for 30 years of poor performance in half the time.
    Jerry W. Investor from Thermopolis, Wyoming
    Replied about 4 years ago
    I agree you must look at the long term. You do need to be conscious of where your market is going. Trying to accumulate more inventory in a dropping market is nuts, but don’t let fear stop you from pursuing your dreams. not buying because things look bad should not deter you when cash flow and other due diligence criteria are met. Had I bought aggressively when the market was bad my portfolio would be amazing now. Of course when you are broke like everyone else its hard to buy real estate.
    Erion Shehaj Real Estate Broker from Houston, TX
    Replied about 4 years ago
    Jerry The truth is none of us know which way the market is going. The best we can hope for when we engage in that exercise is “a good guess” and I’m not sure anyone would want to bet their retirement on that. I’ve found that in the long term, the market gives what the market gives. The investor that follows his long term strategy and completes his acquisitions according to that strategy will always beat the investor that only did ” that one great deal from 2008″.
    Jeff Brown from San Diego, CA
    Replied about 4 years ago
    Good stuff, Erion. The key piece of wisdom from where I sit is, “The strategy is simple—its execution is not easy.”
    Erion Shehaj Real Estate Broker from Houston, TX
    Replied about 4 years ago
    Thank you! It is the execution that gets most of us.
    Chris Rosenberg Rental Property Investor from New York City, NY
    Replied about 4 years ago
    This is the best article regarding the stock market that I’ve read on this site so far. The talking heads usually don’t know a thing and focus way too much on the day to day fluctuations.
    Erion Shehaj Real Estate Broker from Houston, TX
    Replied about 4 years ago
    Thanks Chris. You’re far too kind
    Cory Binsfield Financial Advisor from Duluth, Minnesota
    Replied about 4 years ago
    “Everyone has a plan until they get punched in the mouth. ” Mike Tyson This is why investing is easy and people are hard. They don’t realize that investing is 90% emotions and 10% logic.
    Erion Shehaj Real Estate Broker from Houston, TX
    Replied about 4 years ago
    “…or bit in the ear” (sorry, couldn’t resist 🙂 Your comment is spot on.
    Katie Rogers from Santa Barbara, California
    Replied about 4 years ago
    I was on the other side of the world at the time and slept through the whole thing. However, as per my habit, I always have a few really low priced limit orders on the books for really high quality dividend-paying equities, so I awoke to find I not only owned a couple new positions, but also had an instant paper profit of about 20%. Yay!
    Erion Shehaj Real Estate Broker from Houston, TX
    Replied about 4 years ago
    That’s a great idea Katie. If I may ask, is there a specific discount threshold you look for when placing those limit orders?
    Ryan Chlebek Investor from Austin, Texas
    Replied about 4 years ago
    Great write-up. I wish more people followed this advice. Thanks for the reminder!
    Thomas F. from Kingsport, Tennessee
    Replied about 4 years ago
    When it comes to information I try to apply Sturgeon’s Law, “90% of everything is crap”. So when you start with the idea that 90% of information available is wrong, blatantly biased, half truths or just factually incorrect then you can still look for information but you go out with the idea that you will only get information that checks out from people who are consistently factually correct and when they get something wrong they say it after. People pick up information like they are at a terrible buffet line, grabbing everything that looks slightly interesting and consuming it not knowing that what they picked up is harming them. At least with food your body tells you to stop consuming it, we have no immediate natural reaction to overloading on bad information.
    Helen Chong Real Estate Professional from Campbell, California
    Replied about 4 years ago
    The article has been very well-written. But, I think the market is always on a roller coaster ride so, one cannot ignore the needs of buying a home. If you consult a good real estate agent then probably you will be able to find the best in all seasons.
    Jiri Vetyska Investor from Normandy Park, Washington
    Replied about 4 years ago
    Even Warren Buffet said the same thing about watching stock market. I have to say that I follow the stock market, but mostly for news and to form proper view of the global and local economy. It is much easier to not get distracted by stock market when you don’t play the market. And this brings up the interesting thing about real estate – the RE market moves very, very slowly.
    Replied about 3 years ago
    It is always interesting to see the psychology behind what causes stock market crashes. Stock market crashes are the hardest times for retail investors to hold through and stay patient.