Last month marked the ten-year anniversary of the Lehman Brothers bankruptcy. This event sparked a financial crisis that engulfed the global economy. Economically, we’ve recovered from the downturn, but for some investors the scars remain.
Gone are the days when a borrower needed only a pulse to obtain a mortgage. Whether you blame it on the banks or blame it on borrowers, too many folks jumped into or were placed into loans they couldn’t afford or didn’t understand. Today, banks are much better capitalized than in 2007. The major banks have a much bigger cushion to absorb loan losses, and underwriting standards for home loans are more realistic.
During the Fed’s quarterly press conference, Fed Chief Jerome Powell was asked about financial conditions. Powell said, “The single biggest thing I think that we learned was the importance of maintaining the stability of the financial system.” It’s something “that was missing” back then. He continued with, “We've put in place many, many initiatives to strengthen the financial system through higher capital, and better regulation, more transparency, central clearing, margins on unclear derivatives, all kinds of things like that, which are meant to strengthen the financial system". These measures won’t prevent another recession, and systemic risks haven’t completely abated, but the financial system is in a much better position to withstand a shock than it was in 2008.
Investing is not about timing the market. It’s about time in the market, diversification, and the balance between riskier assets (such as stocks) that have long-term potential for appreciation, versus safer, less volatile assets that are less likely to appreciate (such as bonds, money markets, and CD’s).
Headlines can create short-term volatility. We have experienced the volatility recently, and we’ve seen it nearly every year since the stock market opened. But patient investors who stuck with a disciplined approach were rewarded. Although past results are not an indication of future returns, over the long term, stocks have historically earned a better return than a savings account. While heading to the safety of cash during volatility may bring short-term comfort, opting for the sidelines can have long-term costs.
According to Fidelity, “Investors who stayed in the markets (during 2008) saw their account balances—which reflected the impact of their investment choices and contributions—grow 147%” between Q4 2008 and the end of 2015. “That's twice the average 74% return for those who moved out of stocks and into cash during the fourth quarter of 2008 or first quarter of 2009.” Even worse, over 25% who sold out of stocks during that downturn never got back into the market.
Diversification and asset allocation strategies do not assure profit or protect against loss. Past performance is no guarantee of future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including a total loss of principal.