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401(k) Investors Wonder, How Big a Short?

The very positive Oscar buzz around Adam McKay’s The Big Short, based on Michael Lewis’s account of the run-up to the Financial Crisis of 2008, might resonate quite differently with 401(k) investors, who have witnessed the market buzz-kill over the past quarter. Nevertheless, the film provides us several important reminders as we navigate storms of market volatility which may be with us for some time.

“If there’s a problem with this film,” remarked Dan Scherman, Founder and President of Aequus Equity LLC, “it’s the impression that if you were smart, you saw the crisis coming a mile away. It’s never that obvious at the time. The reason there is a ‘crisis’ is that most of us don’t see it coming, and very few long-term investors can or will react without taking time to assess the situation. As time goes by and the selloff grows deeper, the decision to get out is more difficult.”

Even economic experts like Laurence Siegel and Bruce Jacobs (whose article, “Tumbling Tower of Babel: Subprime Securitization and the Credit Crisis” was probably the best primer on the crisis until the movie appeared) took until December of 2009 to publish detailed accounts of how the crisis came about, and Lewis’s book didn’t come out until March 2010. That is, before even the “smart money” figured out what had happened (much less how to react), the S&P had lost 40%.

Even with the S&P falling about 12% since November, many commentators have reassured us that the present downturn presents little comparison to 2008, while others aren’t so sure, pointing out that however solid the US economy may be on its own, the effects of the recent unprecedented drops in the price of oil will be far-reaching.

“Since most of us aren’t Michael Burry or Steve Eisman [two of a handful of investors who profited from the crash of 2008],” Scherman added, “the best thing to do when markets are gyrating wildly or reaching inflection points is to take a systematic approach. That way, it’s your system advising you when to get out, and when to get back in again, and not your gut.”

Kevin L. Coppola, President, Compass Investors, LLC

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