The Financial Crisis - Almost a Decade Later

The subprime mortgage crisis and excessive risk built into the global financial system were building throughout the summer of 2008 as the market experienced a heightened level of volatility and uncertainty.  Then on September 15^th the bottom fell out of the market and the global financial system shuddered when Lehman Brothers, the fourth largest investment bank in the country (founded in 1850), declared bankruptcy.  The week before Fannie Mae and Freddie Mac were taken over by the federal government and soon after the Lehman bankruptcy other large institutions were on the brink of failure including Merrill Lynch, AIG, Royal Bank of Scotland and others.  To prevent a total systemic collapse, the federal government loaned AIG over $80 billion in exchange for 80% of the company’s equity.  Shareholders were wiped out; however the domino effect was stopped.  These government takeovers led to Dodd Frank regulations that were designed to prevent further government bailouts of other “too big to fail” intuitions.  Just 10 years later many of the Dodd Frank regulations are in the process of being rolled back because they are “bad for business”.  These regulations include the Volker rule, which was put into place to prevent investment banks from engaging in risky behavior that could lead to future bail outs.

During times of crisis or uncertainty it is common for people to seek out advice from the “experts” on how they should act.  Today there are several “experts” who predict another significant stock market correction is imminent.  This is not really going out on a limb, since on average the US stock market experiences a correction of 20% or more every 3½ years or so (according to Ned Davis research using data going back to 1900).  It has been over 6 years since the S&P 500 has had a 20% correction and we are currently enjoying the second longest period of time without a 20% correction since World War II (the longest period of low volatility was from 1990-1998).  During reviews we have been preparing clients for an up-tick in volatility, but volatility is the price to be paid for the ability to participate in the potential long-term gains of the stock market.  Volatility has always been part of investing and always will be.  The trick to long-term success is to avoid selling out of stocks during a decline and to keep focused on the long-term.

For 35 years our firm has been working with individuals and non-profit organizations to help them achieve their long-term goals.  Now more than ever is the time to review your goals and investment objectives and steel yourself for market volatility.  While we are not expecting anything near the magnitude of 2008, a 20% correction would be a normal and healthy development and is probably a bit overdue.

As always, we remain balanced and diversified and focused on the long-term.

The Bond&Devick Team