And it affected the generation born between 1946 and 1964 the most because that cohort was in their prime earning years. They were putting money into stocks and bonds, but they were also putting money into real estate, including secondary homes.
Boomers bought stocks and bonds and real estate with gusto from 2002 to 2007, and then proceeded to dump a large portion of it at fire-sale prices in the next two years.
At the end of it all, the average household was 20 percent poorer in 2009 than just two years before: The net worth of U.S. households and nonprofit organizations went from $69 trillion in 2007 to a trough of $55 trillion in 2009. A loss of a staggering $14 trillion.
That's depressing enough. What's really depressing is that at the moment the market was approaching a bottom, and I am talking about the very end of 2008 and the first quarter of 2009, investors were continuing to dump stocks.
The age-old advice is to buy low, sell high, and not to buy high, sell low. But that's exactly what a huge group of investors did. They sold at the bottom. That's when I became a convert to behavioral economics.
I spent Wednesday morning reading my Trader Talk blog from the first quarter of 2009, and it's clear I was then struggling to understand where the bottom was and why investors were continuing to sell.
February 2009 was a fearful time. An attempt to bottom had been made in October 2008 (October is a traditional month for market "bottoms"), but it had failed. Then, in November we hit new lows.
From my Trader Talk on Feb. 17, 2009: "We are at the November lows, the hope now is that a final capitulation in second half earnings will create a new low that may be the bottom we need."
But it got worse. You could smell the despair in my March 5 blog, the day before the market bottomed: "We go down for 3 weeks and cannot even sustain a two-day rally."
The next day — March 6, 2009 — was the bottom, but my blog sounded even more desperate: "Traders believe a rally is coming, but few are positioned to take advantage of it. Why? Because no one can afford to be wrong ... 'no one can afford another 10 percent down month,' as one analyst said."
A week later, the market had staged a notable rally as bank stocks rocketed off a bottom. The bank index was up 45 percent from the previous week on positive comments from bank executives. The S&P 500 was up 12 percent
But investors did not believe a bottom was in. Indeed, I noted several weeks later that the data firm Trimtabs was reporting there were continuing outflows from equity funds in February and March.
By the last day of July that year, I was still lamenting that investors were continuing to put money into bond mutual funds but not stock funds: "Despite a notable stock market rally in the first six months of the year (the S&P was up 1.8 percent, but up 36 percent from the March lows) , there were OUTFLOWS from stock mutual funds in the first half of the year of $396 million (there's about $4 trillion in stock funds). What's up? Retail investors have been so badly burned by stocks last year that they still do not trust the market; they are showing classic signs of risk aversion by continuing to put money into bonds."
And that's what troubled me most. I had seen my share of modest panics, but I still believed that investors were fundamentally rational in their economic decision-making. Not here: "Buy low, sell high" went out the window; waves of investors sold stocks at their lows, and many, particularly those of my generation, never returned.
Even during the financial crisis, certainly most investors realized the U.S. economy was not going to go to zero, so selling this far down made no economic sense. But that is exactly what happened, and this event helped popularize the entire school of behavioral economics, which emphasized how people really behaved under economic stress, not how they were supposed to behave.