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What we can learn from the 2008 Financial Crisis – 2020 Update

Two years ago (February 2018), we published an article about the 2008 Financial crisis and the crash in the stock market that followed right after. With the markets down because of the Corona Virus, it is interesting to revisit this topic.

I’ve included the full article below. In early 2018 we started to wonder when the markets would experience a correction and concluded that it would eventually come but it would be impossible to predict when.

Our advice was to keep calm during market fluctuations, avoid panic selling and keep focused on long term investment strategies. Make your investment decisions with a long term time horizon.

So, let’s look at what happened since that time.

There was some weakness in early 2018 and a big pullback at the end of 2018, but over the two year period ending the end of February, 2020 the S&P/TSX advanced almost 3,000 points (>20% increase). It just gave up almost 2,000 points (>10% decrease) but it is still higher than where it was when we wrote the article in early 2018.

So, if you started to get nervous in early 2018 and sold all your stock, you would have missed a pretty good return. Some of my friends sold all their stock a long time ago and now mention that they are immune to the recent downturns. I don’t have the heart to tell them that they also missed the run up.

So, our advice remains the same. Keep calm during market fluctuations, avoid panic selling and keep focused on long term investment strategies.

From 2018’s Blog

What we can Learn from the 2008 Financial Crisis – 10 Years Later.

We are remembering (certainly not celebrating) the financial crisis of 2008 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 2008? Quite simply, what 2008 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

  1. 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:

  2. 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.

  3. 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?

  1. 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.

  2. 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.

With the latest downturn in the market due to the Corona Virus outbreak, we thought we should remind everyone to keep calm. But then we remembered that we wrote almost exactly the same post during the last market downturn about one year ago.

So here, from the archives Two years ago (February 2018), we published an article about the 2008 Financial crisis and the crash in the stock market that followed right after. With the markets down because of the Corona Virus, it is interesting to revisit this topic. I’ve included the full article below. In early 2018 we started to wonder when the markets would experience a correction and concluded that it would eventually come but it would be impossible to predict when. Our advice was to keep calm during market fluctuations, avoid panic selling and keep focused on long term investment strategies. Make your investment decisions with a long term time horizon. So, let’s look at what happened since that time. There was some weakness in early 2018 and a big pullback at the end of 2018, but over the two year period ending the end of February, 2020 the S&P/TSX advanced almost 3,000 points (>20% increase). It just gave up almost 2,000 points (>10% decrease) but it is still higher than where it was when we wrote the article in early 2018. So, if you started to get nervous in early 2018 and sold all your stock, you would have missed a pretty good return. Some of my friends sold all their stock a long time ago and now mention that they are immune to the recent downturns. I don’t have the heart to tell them that they also missed the run up. So, our advice remains the same. Keep calm during market fluctuations, avoid panic selling and keep focused on long term investment strategies. From 2018’s Blog What we can Learn from the 2008 Financial Crisis – 10 Years Later. We are remembering (certainly not celebrating) the financial crisis of 2008 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 2008? Quite simply, what 2008 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.and slightly updated, is our post on what do do when the market starts to head down. Don't panic!

Economists have been calling for a recession for a long time and while it is too early to know if this is the beginning of a recession cycle, the markets have certainly been taking a beating

The correction everyone has been talking about is finally here, with the TSX losing over 1,400 points over the last couple of days. Today (Tuesday, February 6) the market is chaotic and it is unclear whether the worst is over, or it is only the beginning.

The professionals have been looking at the situation for months and some have been moving their customers out of equities and into cash, but it is unlikely that any advisor or stock-picker was prescient enough to predict the exact timing of the drop.

And that is the problem. The experts have been predicting a correction for the last year or more. Now we know that selling on January 4, 2018 (at the peak of the TSX) was the right timing. But what if you had listened to some of the pundits earlier and sold one year ago when many people started to worry about a correction? Had you sold on February 6, 2017 would mean you would have missed the current downturn, but you would have also missed the end of the latest bull market - essentially you would have been in exactly the same position as had you held your portfolio through the period as the TSX on February 6, 2017 was about the same as it is today.

And had you sold around September 2017, you'd actually be worse off.

And that sums up the problem - most people can predict that the market needs a correction but no one can consistently predict the timing of the correction. The same was true for all the big crashes that preceded this one.

So, what is an investor supposed to do. You really have two choices: 1) Find a financial advisor and let them worry for you - that is their job full time. or 2) Try not to worry about short term market fluctuations and instead invest for the long term, following the advice and strategies we give on this site. Either way, now is not the time to panic as the damage is likely mostly done. Stay calm and invest for the long term.

#wealthmanagement #FinancialPlanning #personalfinance #StockMarket

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©2020 BY SMART INVESTING FOR CANADIANS

All articles herein are presented as an educational resource and should not be considered as professional financial or individualized investment advice. Readers should always exercise their own judgement when making any decisions about their money.

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