PFP Financial Blog – Lessons for the next Crisis

The 10-year anniversary has just passed of when, in early October 2007, the stock market 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 and the collapse of Lehman Brothers), there will likely 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.

Benefits of hindsight

In 2008, the stock market dropped in value by almost half. Being a decade removed from the crisis may make it easier to take the past in stride. The eventual rebound and subsequent years of double-digit gains have also likely helped in this regard. While the events of the crisis were unfolding, however, a future of this sort looked anything but certain.

Headlines such as

Worst Crisis Since ’30s, With No End Yet in Sight
Wall Street Journal. September 18, 2008. Jon Hilsenrath, Serena Ng and Damian Paletta

Markets in Disarray as Lending Locks Up
Washington Post. September 18, 2008. Neil Irwin and David Cho

For Stocks, Worst Single-Day Drop in Two Decades
New York Times. September 29, 2008. Vikas Bajaj and Michael M. Grynbaum

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