Lessons from the Global Financial Crisis

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25 Sep Lessons from the Global Financial Crisis

This year marks the 10th anniversary of the collapse of U.S. investment bank Lehman Brothers. The run on the bank, previously seen as indestructible, sent shockwaves through global markets, sparking a series of event from which we have yet to properly recover.

Financial journalist Jason Zweig observed that from Sept. 12, 2008 to March 9, 2009, the S&P 500 (an index comprising of the U.S.’ 500 largest companies by market capitalisation) declined by a whopping 45.15%! An investor exiting the market at that point would have stood to lose almost half the value of their investments in the space of around 6 months, however for those clients who sat tight and remained invested in the markets, the outcome was very different.

Between Sept. 12, 2008 and Sept. 14, 2018 (see graph) the S&P 500 grew by 171.9%, (10.5% annualized).

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Although damaging and somewhat scary, history shows us that financial crises are a naturally-occurring part of the financial system. History also shows us that extreme declines in the stock market are followed by major rebounds.

The chart below shows the performance of global stock markets between 1926 and 2017. A bull market denotes an ascending return, stemming from the lowest close after the market has fallen 20% or more, to the next market high. A bear market on the other hand, represents the opposite, beginning at a high close and descending 20%.

Bull-Bear

Since 1926, the global equity index has witnessed a decline of 20% or more on nine separate occasions! Equally of note, was the scale of peak-to-trough movements, which on average exhibited a decline of 37% and took 20 months to recover.

In history, every major market decline has been followed by a rebound, which exceeded the previous decline, both in terms of cumulative return and duration. It is almost as if these financial crises occur to test an investor’s patience!

While historic data is not a strong predictor of future capital gains, it offers valuable insights into the cyclical nature of markets. Markets will inevitably experience crises, but it is important not to panic and exit the market when these crises arise, as the potential gains stemming from the following bull markets will be squandered. We acknowledge that this can be difficult as an individual’s complete financial security is on the line and when this is combined with hysteria-inducing warnings from the financial press, investors tend to act irrationally. However, we stress the importance of not letting fear take control and advocate that clients take consolation in the fact that patience and calmness will ultimately deliver reward.