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The Financial Crisis – 10 Years On

By 30th October 2017 No Comments
Financial Crash

The Financial Crisis – 10 Years On

Incredibly it is now the 10-year anniversary of when, in early October 2007, the American equity
market index, the S&P 500 hit what was its highest point before losing more than half its value over
the next 18 months during the global financial crisis.

Over the coming weeks and months, as other anniversaries of major crisis-related events pass (for
example, 10 years since the bank run on Northern Rock or 10 years since the collapse of Lehman
Brothers), there will probably be a steady stream of retrospectives on what happened as well as
opinions on how the environment today may be similar or different from the period leading up to the
crisis. It is difficult to draw useful conclusions based on such observations – financial markets have a
habit of behaving unpredictably in the short run. There are, however, important lessons that investors
might be well-served to remember: Capital markets have rewarded investors over the long term, and
having an investment approach you can stick with—especially during tough times—may better
prepare you for the next crisis and its aftermath.

THE BENEFIT OF HINDSIGHT

In 2008, the equity market dropped in value by almost 50%. Now 10 years on from the crisis, it might
make it easier to take the past in our stride. The eventual rebound and subsequent years of double-
digit gains have also likely helped in this regard. However, while the events of the crisis were
unfolding a future of this sort looked anything but certain. Headlines such as “Worst Crisis Since ’30s,
With No End Yet in Sight,” 1 “Markets in Disarray as Lending Locks Up,” 1 and “For Stocks, Worst
Single-Day Drop in Two Decades” 2 were common front page news. Reading the news and opening
quarterly statements or going online to check an account balance were for many, stomach-churning
experiences.

While being an investor today (or during any period, for that matter), is by no means a worry-free
experience, the feelings of panic and dread felt by many during the financial crisis were distinctly
acute. Many investors reacted emotionally to these developments. In the heat of the moment, some
decided it was more than they could stomach, so they sold out of equities. On the other hand, many
who stayed the course and stuck to their approach, recovered from the crisis and benefited from the
subsequent rebound in capital markets.

It is important to remember that this crisis and the subsequent recovery in financial markets was not
the first time in history that periods of substantial volatility have occurred. Exhibit 1 below helps
illustrate this point – it shows the simulated performance of a balanced investment strategy following
several crises, including the bankruptcy of Lehman Brothers in September of 2008 which took place in
the middle of the financial crisis. Each event is labeled with the month and year that it occurred or
peaked.

Exhibit 1. The Market’s Response to Crisis

Simulated Performance of a Balanced Strategy: 60% Stocks, 40% Bonds

WGgraph1

1. washingtonpost.com/wp-dyn/content/article/2008/09/17/AR2008091700707.html.
2. http://nytimes.com/2008/09/30/business/30markets.html.

(Cumulative Total Return)

Exhibit 2. Performance as at 30 September 2017

WGgraph2

Past performance (including hypothetical past performance) does not guarantee future or
actual results.

Although a globally diversified balanced investment strategy invested at the time of each event would
have suffered losses immediately following most of these events, financial markets did recover, as
can be seen by the three-, five- and ten-year cumulative returns shown in the exhibit. In advance of
such periods of discomfort, having a long-term perspective, appropriate diversification, and an asset
allocation that aligns with your risk tolerance, financial goals and the life you want, can help investors
remain disciplined enough to ride out the storm. A wealth manager or financial planner can play a
critical role in helping to work through these issues and in counseling investors when things look their
darkest.

CONCLUSION

In the mind of some investors, there is always a “crisis of the day” or potential major event looming
that could mean the beginning of the next fall in markets. As we know, predicting future events
correctly, or how the market will react to future events, is a difficult exercise. It is important to
understand that market volatility is a part of investing. To enjoy the benefit of higher potential returns,
investors must be willing to accept increased uncertainty. A key part of a good long-term investment
experience is being able to stick with your investment strategy, even during tough times. A
well‑thought‑out, transparent investment strategy can help you be better prepared to face
uncertainty and may improve your ability to stick with your plan and ultimately capture the long-term
returns of capital markets.