Ten Years Later: The Lessons of the Great Recession

Ten years ago we experienced a crisis in the subprime mortgage market that led to a global recession, what we now call the Great Recession. If you were an investor at that point, you probably remember it well because the stock market dropped so dramatically. From a peak of 14,000 points in October 2007, the Dow Jones Industrial Average bottomed out at 6,600 in March 2009. And so did our portfolios. But here is the important point: If you were an investor in March 2009, you survived. If you didn’t panic and sell your holdings, then today your portfolio is probably thriving. Let’s fast-forward to today to underscore the point: We are experiencing remarkably stable markets, and 2017 was up consistently. In fact, 2017 was the first year that both the Standard & Poor’s 500 and Dow Jones climbed every month of the year!

An Unusual Period of Rising Markets

A look at the statistics reveals how unusual this trend is. According to Morningstar and Ibbotson Associates, the market goes down about 25% of the time—so roughly one in four years. We haven’t had a major downturn for nearly a decade.

I’m reminded of the saying “What goes us must come down.” And it’s true that someday we will enter a period of down markets. However, my crystal ball is no clearer than yours, and I can’t say when the market will go down. It may fall tomorrow; it may fall two years from now; it may be 10 years from now.

We can see that the underlying economic data are good: We have a low unemployment rate; wages are thriving; manufacturing is strong; and Christmas sales (a barometer of consumers’ optimism) are projected to be good. During the election campaign, people predicted doom and gloom no matter which president was ultimately elected. Yet the market continues its upswing, regardless of the president in office and potentially market-jarring issues like North Korea, immigration, and health care reform.

Markets Remain Unpredictable

However, stock market downturns often happen because of events we do not anticipate, and perhaps that is Lesson #2 of the Great Recession. The subprime meltdown seemed to come out of nowhere, and perhaps the next downturn’s cause will seemingly appear out of nowhere too. Throw in investor panic, and the selling could trigger a downturn.

What to Do for Now

So what do we do? First, take a look at the chart below. It shows the cycle of our emotions as the markets rise and fall—and exemplifies one of the most important rules for investing: Stick to a long-term perspective.

marketriseandfall
marketriseandfall

Since we are not psychics, we must maintain a long-term perspective. We stick to our investment goals rather than give in to the euphoria (and greed) that comes at the top of the market, when we want to buy while prices are at their peak. And when the inevitable downturn occurs, we still stick to our investment goals rather than give in to the despondency that causes us to sell while prices are at their lowest.

That’s why it’s so important to remember the Great Recession a decade later: If you kept your head about you, you enjoyed the growth following the market’s bottoming out. In short, you survived. So take heart. When the next downturn comes, whenever it comes, you will survive again.