Classes from previous monetary crises are preparation for the longer term
Do financial crises occur more often?
Almost four decades passed between the crash of 1929 and the bear market of 1968. Fast forward to the 21st century – only 20 years passed between three financial crises: the dot-com crash in 2001, the global financial crisis in 2008 and in 2020 the economic recession of the Covid-19 pandemic.
Occasions that used to be rare, isolated events are becoming more and more common. According to a study by Nationwide’s Advisor Authority, 68% of investors with investable assets of $ 100,000 or more expect to weather more financial crises during their lifetime. In addition, 35% of the investors surveyed expect to survive three or more other crises.
One of the best ways as an investor to prepare for future financial crises is to look back on past events. While the economic recession of the Covid-19 pandemic is certainly in the foreground, the financial crisis of 2008 still weighs heavily on investors’ financial decisions today.
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In the Nationwide poll, 37% of investors were most likely to say that the 2008 crash and subsequent global financial crisis had the greatest impact on their approach to finance and investing. This outperforms the 2020 Covid-19 crash and recession (28%), as well as every other major financial crisis of the last century, including the 2001 dotcom crash (9%), the 1990 recession (6%), Black Monday 1987 (4 %), Recession 1981 (6%), OPEC embargo 1973 (3%), bear market 1968 (2%), crash 1929 and global economic crisis (5%).
Take a moment to reflect on your own experiences during the Covid-19 crash and recession in 2020 or the global financial crisis of 2008. What steps have you taken to adapt your approach to personal finance or investing?
If you’ve made a change, you certainly weren’t alone. Many investors changed their behavior in response to the financial crisis that hit them hardest. Sometimes the changes were for the better, sometimes not.
The main changes investors made in their approach to managing their personal finances were to establish and maintain a budget (22%) and set up a “rainy day” or “emergency fund” (21%) and work with an advisor or Financial professionals (21%). Key changes to their investment approach include more conservative asset management (20%) and a new strategy to protect assets against market risk (17%) while using the downturn as a buying opportunity (17%).
In general, these practical or cautious adjustments were likely smart moves that had a positive impact on financial results.
On the other hand, some investors made more hasty or more emotional investment decisions.
These included liquidating assets from qualifying retirement plans to cover financial obligations (12%), liquidating assets from unqualified investment accounts to covering financial obligations (12%), moving the majority of their investments from stocks to cash (9%). and panic selling investments at a loss (7%).
If you find yourself in a situation where you are considering these types of measures the next time a crisis occurs, it is important to understand that they are likely to have long-term adverse consequences. They should only be considered as a last resort in close consultation with a financial professional.
According to the nationwide survey, consultants and financial experts are more confident than investors about mastering future crises. Having lived through previous crises, 70% of consultants and financial professionals surveyed are more confident about protecting their clients’ finances and investments in the event of another crisis – compared with just 44% of investors.
In addition, 66% of financial professionals are more confident about investing their clients’ assets in the stock market, compared with just 38% of investors.
Investors can benefit from the knowledge and advice of advisors and financial experts. Her experience – forged by helping clients cope with past crises – qualifies them to prepare their clients for the next time a disaster might occur.
In the past year alone, many investors have started working with financial professionals.
The nationwide survey found that 91% of investors agree that working with a financial professional will help them make the right investment decisions even in an extreme financial crisis. In addition, 89% of investors say that having a plan for their investments helps them stay in control – even when they can’t plan everything.
I wish I could say with confidence that it will be a long time before our next financial crisis. The truth is that most crises are difficult to predict, but if history is any clue, at least one more is likely to happen again in your life. It is therefore important that we learn from past experiences and use that knowledge to prepare for the unexpected.
While we should all be financial planning students, advisors and financial professionals are likely to provide a broader knowledge to guide you to the right decisions now and in this crisis.
It’s never too late to start safeguarding your financial future – you’ll likely be glad you did when the next financial crisis hits.