Growing up in two market bubbles

I was 10 years old when the stock market entered an epic gurgle and burp. The technology bubble was well underway. As a child, I couldn’t help notice the daily papers’ coverage. Cisco, IBM, and Microsoft were going to stun the world, and a wealth of startups were making groundbreaking achievements through the Internet. Stores were moving online — people could buy stuff from their couches. And the market loved it.

Then it all came crashing down. Without profits and expected cash flow, companies petered out. They couldn’t sustain their losses, and the market was late to the realization. Nonetheless, as soon as people began selling the tech sector, stocks were doomed. The NASDAQ collapsed over a one-year period. While some had benefited from the meteoric rise, many failed. They chased moneyed dreams. The market had become a ponzi scheme of sorts, and the burst annihilated portfolios.

Average Joe’s and Jane’s across the world were affected. Money disappeared from pensions, IRAs, 401ks, and regular old investment accounts. Suddenly, people’s spending reduced — sour from massive losses and concerned about financial futures. People cut back because their ability to save and earn was jeopardized.

Putting the past behind us

Over time, these booms and busts are held in reverence. Ah, remember the market crash of 1999-2000? How about Black Monday? Oh, and how about the Great Recession of 2007 to 2009? Those were the days, right?

We try to put these events behind us and focus on the future. Some may say, “We’re long past those idiotic dreams and bubbles. We know better now.” We treat these as abnormalities — one-off events. The mavens repeat their mantras to calm the masses: “Timing is your friend. The market will recover.” But we never fix the underlying, systemic problems; thus, the cycle continues: boom and bust after boom and bust.

Wallets eventually open again. The economy eventually “bounces back.” In time, market optimism returns because consumer discretionary spending increases. Stocks get bid up again. And while we hope another bubble never returns and convince ourselves that a lesson was learned, something in us remains. We are still humans — the ones who caused the bubble in the first place.

That mentality to save every penny in crises fades like the hangover of a party best forgotten. We get excited again, and invest in financial instruments that some “guru” recommends that make little sense to us. We convince ourselves that we know better than to fall into some scam or trap. Eventually, the price of stocks becomes too expensive to sustain their momentum — for whatever the reason — and the roller coaster plummets.

Boom and bust cycles are everywhere

Even beyond the stock market, various points in history talk about cutting back and saving. For instance, the entire country rationed gasoline, coffee, and other necessities for those in combat during World War II. Our sacrifices would win the war. Our rationing would help others in need. And our country helped us collectively achieve this goal. These were frugal times. But after World War II ended, the country entered one of the largest economic growth spurts of all time. Production was enormous and the largest generation followed: the Baby Boomers.

More recently, an epic drought has swept over California. Crops are unable to grow and farmers are being asked to cut back on water usage. Without rain and irrigation, this might be one of the worst seasons for the West coast. Every time you look at the map of California it’s bright red for “exceptional drought.” There isn’t another level dryer, unless we’re forced to create it.

This exceptional drought has led to more brush and forest fires. People and their homes have been threatened. The state has fought bravely against these disasters, and many are pitching in to conserve and ration their precious water. Smartphone apps have been created to rat out neighbors who are using more than necessary. Residents are being asked to let their lawns brown. Certain crops and foods (i.e., almonds) are being targeted because of their excessive water needs.

The city of glitz and glamour, Los Angeles, has been a focal point for conservation. Rivers are non-existent and the heat bakes the surface. Many celebrities have extolled the value of cutting back, too. But everyone is wondering whether California will be able to weather this drought. What if the rains never return in full force? What if the land stays perpetually scorched? How long could this exceptional drought really last?

At many points in history we’ve done well rationing, scrimping and saving amidst tragedy. We come together and embrace each other as humans. We work together to move beyond struggle. And we ultimately have overcome every major concern we’ve ever faced. But over time, humanity has a painfully ironic inability to hold back and resist the urge to spend and splurge. We seem to perpetuate feast or famine — unable to live in moderation and within means. If history repeats itself (and it does), then we will likely see California boom again if the rains return. People will resume their previous water usage and restaurants will once again drop off full glasses of water without asking first.

Five ways to weather any storm

From the stock markets to droughts to wars, the booms and busts are everywhere. If we admit that we have a cyclical problem, the question becomes, What can we do about it? The following are five rules to follow a middle path in times of tragedy and prosperity:

1. Create a rationed budget

At the heart of saving more and spending less is a good budget, but what if you lopped off $100, $200, $300, or more each month? What if you pretended that the money was gone? In modelling the potential new budget during a tragedy or bust cycle, you can see the depths of your budget. If all else failed and suddenly made less each month, how would your spending change? How would your savings change? How would you cut back? The essential aspect to this thought experiment is actually going forth with it. Enact the rationed budget and see how low you could go. Pretend that the crisis is here, and save for better times. Then, if a problem occurs, you’ll follow a path of moderation.

2. Spending shouldn’t change based on market optimism

It’s easy to get swept away in the good times. People buy enormous houses, $1 million vehicles, and gigantic yachts when the market is doing well. Success looks like materials, so people buy in. To weather storms, spending cannot cave to market swings. Consistency is key. When others start buying wildly and race to the top, you should be thinking about where you’re spending too much.

3. Saving shouldn’t be limited to tough times

Saving money and concentrating on safe investments should always be a first priority. That priority shouldn’t waver or change amidst good times or bad. Tough times are the hardest time to save, actually. Think about it, if times are tough, you’re clearly strapped for cash. Save in the windfalls, booms, and busts. Again, to find the middle path amidst the excitement and tragedy, you need to calmly continue your savings.

4. Don’t trust market makers and commentators

Turn on CNBC and your brain will instantly accommodate talking heads’ suggestions. Their swanky ties, expensive suits, beautiful sets with technology galore, and impressive lifestyles can be captivating. I’ll be the first to admit that being able to eat at wonderful restaurants, travel the world in a jet, and drive a fast car sounds intriguing. But those market makers and commentators are selling a life that is temporary and not available to everyone. I will never own a jet or drive a Ferrari. Why would their advice and financial “expertise” help me? They live in a different category of human. Try to avoid their messages, as it can help you stay frugal.

5. Find a greater purpose/sacrifice to motivate modest lifestyles

Modest lifestyles can be challenging. It means eating out less, owning less, and looking for ways to invest and save every extra penny you have. But doing any of these things means bucking a system that encourages spending everywhere you go. Walk out the door and you’re bombarded by places to go, see, and spend. It’s easier to listen to these messages. To have a lasting, rationed budget or save more, you must find a higher purpose and reason to dig deep. Saying you get to live modestly through booms and busts isn’t enough. For me, I recognize that climate change is directly affected by my consumption behaviors. That changes my behavior. Additionally, I hold powerful regard for time to be peaceful, calm, and at rest. I value time over money.

We can leave the boom and bust cycle. We can protect ourselves and those around us, too. Create a rationed budget, and live it. Spend less than those around you. Save more than you thought you could. Don’t waiver as others panic or lavish themselves. Lastly, find a higher purpose that’ll motivate you when the going gets tough.