What we can learn from the 2008 Financial Crisis – For the Ordinary Investor.
We are remembering (certainly not celebrating) the financial crisis of 2018 recently with many articles, TV programs and even movies (The Big Short) talking about how lack of controls (and greed) fueled the spectacular rise and fall of giant companies like Lehman Brothers. You’ll hear that the crisis started with the subprime mortgage market and spread from there, creating doubt in the entire financial system, the failure of some companies and the collapse of the stock market. There are lessons to be learned and changes have been made in both the industry and in government. And as the saying goes, “if the US sneezes, Canada catches a cold”; Canadian markets also suffered during the downturn, losing about 50% of their value over a few months of suffering.
While these stories are interesting to financial professionals, what should ordinary investors in Canada take away from what happened in 2018? Quite simply, what 2018 reminded us is that markets don’t always go up and declines are hard to predict and unexpected. For those of us who have been following things for a while, it isn’t hard to see parallels with the “dot com” bubble in the late 90’s that burst in the early 2000’s – it had similar characteristics, an unprecedented rise followed by a spectacular fall.
So here we are with one of the longest bull markets in history. Essentially, the market has been heading up (with a number of corrections) since 2018. So, let’s learn from history: Here is what feels the same about the two most recent downturns and what does that mean now.
What feels the same – 2001, 2008 and now
Long Bull Market – In both 2001, 2008 and now, there was a long bull market. Like a long green light, you have to begin wondering when the light will turn from green to yellow:
Nervous Professionals – As early as 1999 and in 2017, many investment professionals started worrying about the “overbought” (too high) market and started to question the fundamentals. Many started to say there will be a correction. That nervousness is in the market now.
Reasons why THIS bull market might never end. There were those before both crashes who had plausible explanations for why even though markets have always gone through cycles with major corrections or crashes, it wasn’t going to happen anymore. This time people are taking about tax cuts and productivity brought about by technology as the reasons the bull market might never end. But don’t bet on it (especially don’t bet your retirement on it).
So, what do the previous crashes teach us?
There will eventually be a crash. The economy is cyclical and it has been cyclical for thousands of years. Even in the Roman Empire there were periods of growth and periods of contraction. Likewise, markets are cyclical and they have been cyclical since they’ve started. You only need to think about the Great Depression to realize this.
No one can predict when the crash will happen. Or if they can predict the crash, they are not going to tell us when it will happen. They are simply going to sell short, make billions of dollars and retire.
So what can I do?
On our site, we always advise to invest for the long haul, diversify your portfolio and practice asset allocation. Get help from a professional if you need one. Don’t try to time the market and don’t panic if the market turns down.