Time heals all wounds?

September 15th, 2018 marked the 10-year anniversary of Lehman Brothers bankruptcy.  Many historians will point to this seminal moment in history as the spark that ignited the Great Financial Crisis. At the time of collapse, Lehman Brother’s had been around for over 150 years and it was the fourth largest investment bank in the country. A failure of this magnitude was unimaginable. Shockwaves were sent throughout the global financial system as investors began to realize the toxic debt that brought down Lehman was owned by nearly all major financial institutions.  In a blink of an eye, fear penetrated the capital markets and credit markets froze. Mistrust of the financial system brewed throughout the country and echoes of panic grew louder with every passing day.  The viability of our entire country’s banking system was put into question as total panic took over. The financial damage that followed was devastating.

Below are some staggering statistics as a result of the Great Financial Crisis:

  • Over 8.8 million jobs lost

  • Unemployment rate reached 10% (we are at 3.8% today)

  • Over 6.5 million homes lost to foreclosure

  • Nearly $10 trillion of home equity wiped out

  • Global stock markets fell 40-50%

The 2008 crisis is considered to have been the worst financial crisis since the Great Depression – a once in a lifetime event. For years, millions around the country felt trapped in an abyss of hopelessness with no escape in sight. With resiliency and time, Americans eventually climbed their way out. The road back to recovery was long and arduous, but 10 years later, our economy has bounced back as strong as ever. Today, unemployment rates are at record lows and the stock market is closing in on 10 years of a bull market.

Time heals all wounds, but in this case, it was not time, but a herculean effort by the Federal government that should take the credit. Shortly after the Lehman fall, the Federal government and central bank took unprecedented action to stabilize the financial system through quantitative easing. The U.S. Treasury purchased millions of toxic mortgage related assets to calm the capital markets and bailed out the banks. In addition, the Federal Reserve brought interest rates down to 0%, allowing banks and consumers to borrow money at low rates to stimulate the economy. Bank bailouts were not a popular choice, but one that was needed. Many Americans viewed this as unfair and preferential treatment towards Wall Street, but in hindsight, one thing is clear. These policies were absolutely needed to keep the financial system and economy from collapsing into another Great Depression. A repeat of the Great Depression would have impacted families not for the next few years, but for generations to come. Quantitative easing succeeded by restoring trust and confidence in the banking system and expediting the economic recovery.  

As negative and painful as 2008 was, there were three important lessons investors can learn from it.

  1. Investing in stocks can be volatile. Stocks do not go up in a straight line and volatility comes with the territory. Bear markets are much more common than most realize – there have been over 14 bear markets over the last 70 years. This is not the first time stock markets fell more than 20% and it certainly will not be the last.

  2. Volatility can be your friend. The S&P 500 index lost 47% from September 2008 to March 2009 but reached record highs within five years and returned over 300% from the stock market bottom in 2009. Investors who held on to their stocks during the tough times did well, but those who took advantage of the volatility did even better. Warren Buffett famously said, “Be fearful when others are greedy and greedy when others are fearful.” We recognize how difficult it is to add money to the stock market during a bear market and to get the timing right, so we take a different approach. We utilize sophisticated trading technology to help us stay on track with our target stock/bond allocations for client portfolios. When stocks fall, and bonds maintain their value, the portfolio weighting of stocks and bonds will be out of tolerance. This process encourages us to sell bonds that have held their value to purchase stocks that are trading at discounted prices when volatility is at its highest. Volatility is painful, but it also provides investors who have a well-diversified portfolio an opportunity to purchase stocks at attractive prices.

  3.   Get the important things right. Invest in a portfolio that has an appropriate amount of risk for you to achieve your financial goals. Do not let the fear of missing out (FOMO) cause you to make irrational investment decisions and take on more risk than you are comfortable with. We have seen this play out many times in recent history: technology bubble in the 90s, housing in 2007, and Bitcoin more recently. Each time, it did not end well. Staying disciplined and sticking to your long-term plan increases your probability of reaching your financial goals. Portfolios and risk tolerance will evolve over time based on personal situations (i.e. retirement, inheritance, etc.), but temporary market environments should never influence portfolio changes.

It is hard to believe 10 years has already passed since the 2008 financial crisis.  In some ways it seems like a distant memory, but in other ways, the experiences we had during the crisis will be present in our minds forever. The pain it caused may linger, but it is important for us to look forward. When the next stock market downturn occurs, we need to be stay disciplined and remember the lessons we learned from 2008.