Five Years After 9/11

Five years ago, I sat riveted to the television screen watching the carnage unfold in Manhattan and at the Pentagon, across the Potomac River from Kiplinger. Only later did we learn that brave passengers forced the crash in Pennsylvania of another hijacked jetliner that was headed for either the Capitol or the White House, just two blocks from our offices.

The last thing on my mind was investing. But Mark Solheim, who ran Kiplinger.com back then, suggested I pull together a piece on how the 9/11 attacks should affect our readers' investment strategies. (You can read it here.)

I recall now how surreal it felt dialing experts on the telephone and asking them how the deaths of thousands of innocent Americans would alter the investing climate. My fingers were leaden, and my questions and their answers sounded a little shameful.

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But five years later, I think 9/11 and its aftermath holds useful lessons for investors. The crucial one: Don't overreact to global events. The world often appears as if it's going to hell in a hand basket. But it's usually not. And even when things do get downright awful, the stock market is a pretty efficient discounting mechanism. By the time you decide to change your investments because of major events, the news is already reflected in stock prices. You're almost always better off just sitting tight.

The after effects

In my piece five years ago, I tried to pick winners and losers. I anticipated that consumer confidence would suffer, particularly hurting retailers and the travel and leisure industries. I also wrote that defense and security companies, as well as domestic oil and gas producers, stood to benefit and that investors had overreacted in pummeling the shares of insurers.

This hardly took trenchant analysis. Nor was all of it correct. I wrote that "consumer confidence ... was the main prop keeping the economy out of recession." In fact, the economy had fallen into recession in March 2001, experts later concluded. The economy hit bottom in November, and then began growing again, according to the National Bureau of Economic Research.

But there was no way to act even on the things I got right. The markets never opened that Tuesday and remained shuttered the rest of the week. When stock trading resumed, the market plunged, as expected. The stocks I had identified as winners and losers almost immediately rose and fell -- too rapidly for most individual investors to capitalize on the moves.

Lessons learned

Still, the major point of my piece from five years ago has stood the test of time. Markets tend to react to economic, not geo-political, events. It's whether the company down the street gets a new contract or not -- not whether Iraq is falling into civil war -- that drives share prices. When awful things happen, the markets tend to sell off briefly, then quickly regain their equilibrium.

I looked at such events as Pearl Harbor, Franklin D. Roosevelt's death, John F. Kennedy's assassination and Saddam Hussein's 1990 invasion of Kuwait. After the overwhelming majority of such cataclysmic events, the markets steadied quickly -- or even headed upwards once the initial shock wore off.

Indeed, after bottoming in October 2002, the ensuing bull market didn't really began to gain traction until March 2003, just as the Iraq war was beginning. The lesson is this: Don't sell your stocks because the world seems a mess. As I wrote then, "this is no time to abandon stocks." Nor is it now.

Steven Goldberg is a freelance writer and former senior associate editor of Kiplinger's Personal Finance magazine.